What's working in music
Having a ball
In the supposedly benighted music business, a lot of things
are making money
The Economist Oct 7th 2010
EVEN by the elevated standards of such things, Lady Gaga’s “Monster Ball” concert is over the
top. The show, which is loosely organised around the theme of a woman’s search for the ultimate
party, features a fountain of fake blood, a burning piano and a host of dancing men. At one point
Gaga is encased in a spinning gyroscope. Later she is done up to resemble a remote-controlled
snowflake. At about $100 plus parking, nearly all the shows are selling out. Welcome to the
supposedly doomed music business.
For the past ten years sales of recorded music have declined so steeply as to become a cautionary
tale about the disruptive power of the internet. The rise of illegal file-sharing and the end of the
digital “replacement cycle”, in which people bought CDs to replace tapes and records, caused
spending to collapse. Sales of CDs, tapes and records have slid by 40% in Britain since 2001,
according to the BPI, which represents record labels. In Japan, the world’s biggest CD sales
market, the number of discs sold fell by 6% in 2008 and 24% in 2009. Price cuts meant that
revenues dropped even more steeply.
The rise in digital music-sales is scant compensation. People tend to buy tracks, not albums, from
sites like Apple’s iTunes. They can obtain their favourite music much more cheaply than they
could in the CD era. And even digital sales are now stalling. In Japan, mobile and online singletrack sales rose only a shade during 2009. So far this year Americans have bought 841m digital
tracks, mostly from Apple’s iTunes, according to Nielsen Soundscan—down from 847m at this
point last year. Apple now offers plenty of other opportunities to spend money, from iPads to
more than 250,000 apps. Music executives believe the company is cannibalising the musical part
of its own business.
Yet the music business is surprisingly healthy, and becoming more so. Will Page of PRS for
Music, which collects royalties on behalf of writers and publishers, has added up the entire
British music business. He reckons it turned over £3.9 billion ($6.1 billion) in 2009, 5% more
than in 2008. It was the second consecutive year of growth. Much of the money bypassed the
record companies. But even they managed to pull in £1.1 billion last year, up 2% from 2008. A
surprising number of things are making money for artists and music firms, and others show great
promise. The music business is not dying. But it is changing profoundly.
1 The longest, loudest boom is in live music. Between 1999 and 2009 concert-ticket sales in
America tripled in value, from $1.5 billion to $4.6 billion (see chart 1). Ticket sales wobbled in
America during the summer of 2010, but that was partly because some big-selling acts took a
break. One of the most reliable earners, Bono, U2’s singer, was put out of action when he injured
his back in May. Next year many of the big acts will be on the road again, and a bumper year is
expected.
It is not that more people are going to concerts. Rather, they are paying more to get in. In 1996 a
ticket to one of America’s top 100 concert tours cost $25.81, according to Pollstar, a research
firm that tracks the market. If prices had increased in line with inflation, the average ticket would
have cost $35.30 last year. In fact it cost $62.57. Well-known acts charge much more. The
worldwide average ticket price to see Madonna last year was $114. For Simon & Garfunkel it
was an eye-watering $169. Leading musicians have also, by roundabout means, seized a larger
share of the mysterious “service” charges that are often tacked onto tickets.
Fans complain bitterly about the rising price of live music. Yet they keep paying for concerts.
One reason is that the live-music experience has vastly improved. Lots of shiny new venues have
been built since the mid-1990s, many subsidised by governments in the hope that they would
revitalise decayed downtowns. And musicians are much more enthusiastic about performing live.
The misery of touring was once a familiar musicians’ gripe, inspiring songs from the Rolling
Stones’ “Torn and Frayed” to Ice-T’s “Lifestyles of the Rich and Infamous”. But those songs
were written in the days when touring was a way of marketing recorded music. Now it is a direct
source of profit.
However much fans pay to get into a venue (and thanks to ticket touts they often pay more than
even the greediest artists charge) they tend to have cash left over. This they spend on
merchandise. “We have grown along with the touring business,” says Tom Bennett, the head of
Bravado, which sells T-shirts and other paraphernalia. Bravado’s revenues have more than
doubled since 2007, when it was acquired by Universal Music Group—although that is partly
because it has signed up new acts. And merchandise has moved well beyond the arena. Nearly all
2 Bravado’s turnover used to come from sales at concerts. Now about half comes from retail
stores.
You can always get what you want
The re-release of the Rolling Stones’ 1972 album “Exile on Main Street” in May was
accompanied by a merchandising blitz that illustrates how far the business has evolved beyond
selling black T-shirts. Bravado released more than 100 items, from baseball caps to boxes
containing signed lithographs. There were not only album-cover T-shirts but also a higher-priced
“as worn by” collection, featuring reproductions of clothes that members of the band happened
to be wearing in the early 1970s. The huge range of items at different prices meant products
found their way into budget stores like Target as well as dearer ones like Bloomingdale’s.
The Stones are wily old businessmen: they were among the first to realise that fans would pay
more for concert tickets. But even up-and-coming acts now try to build livelihoods around
merchandising and live performance. Scorcher, a rapper from London who recently signed his
first record deal, set up a clothing label even before he made his first video. He invariably wears
his own products in the music videos that he gives away on websites like YouTube. Scorcher is
not so much selling music as using music to sell. “If you buy into me musically, you will also
buy into the clothing and the lifestyle,” he explains.
Music’s cachet and emotional pull also make it a potent weapon for businesses that want to build
their own brands. The Rolling Stones (again) led the way in recruiting tour sponsors, from
Sprint, a phone company, to Ameriquest, which sold mortgages. Sponsorship can lead to
musicians wearing a company’s clothes and naming songs after it: Rascall Flatts, a country
music band, has done both for American Living, a label carried by JCPenney. IEG, a firm that
tracks the market, estimates that the value of tour sponsorships in North America will reach
$1.74 billion this year, up from $1.38 billion in 2006.
Music’s best business customer is television. “Watch an evening’s worth of TV and count how
many times you hear music in the background,” says Jeremy Lascelles, chief executive of
Chrysalis. Your correspondent tried, and found that a new tune appeared, on average, every 40
seconds. Many necessitated payments to songwriters and the music publishers, like Chrysalis,
that represent them. Publishers have become increasingly adept at hawking their wares to
programme-makers. And music is not always in the background of TV programmes. Some of the
most popular shows of the past few years—“American Idol”, “Glee” and “The X-Factor”—have
been music shows.
Because it derives revenues from business as well as consumers, publishing is much more stable
than recording. Record companies’ publishing departments, which once seemed rather dowdy
next to sexy, talent-spotting A&R, have become vital cash machines. Publishing supplied 29% of
EMI’s revenues and 45% of its profits in the year to March 2010. The outfit’s new boss, Roger
Faxon, comes from that side of the business—a reflection of how the economics of music have
shifted.
3 On television, music is either supported by advertising or bundled invisibly into the cost of payTV subscriptions. That model is spreading from the box to the web. Free music-streaming
services like We7 and Spotify have proliferated in Europe: the latter claims 10m users. America
has Vevo, a music-video website linked to YouTube and owned in part by Universal Music
Group and Sony Music Entertainment. Because Vevo’s content is consistently professional, it
draws advertisers. Rio Caraeff, who runs the outfit, says companies pay $25-30 to reach 1,000
viewers. That is more than television networks tend to get, although Vevo reaches fewer people
and runs many fewer ads (just 15 seconds every six-and-a-half minutes).
I feel free
The free music-streaming services have not yet brought in money commensurate with their huge
audiences. In 2009 ad-supported digital music earned just £8.2m for British record companies,
less than 1% of total revenues. But some have started charging fans for tunes on mobile
phones—charges that may be bundled into monthly voice tariffs. Some music executives view
the streaming services as the industry’s best hope.
Whether they are or not depends on where the new users of free streaming websites come from.
If Spotify and Vevo are drawing people away from the CD racks and the iTunes store, they are
undermining the industry. If, on the other hand, people are streaming music online rather than
downloading it illegally from a BitTorrent site, the industry gains. It has converted a user who is
worth nothing to someone who is worth a little. And the pool of pirates is so huge at present
(IFPI, an international trade group, reckons that 19 out of every 20 tracks downloaded are illegal)
that it ought to be possible to make serious money from persuading people to make the switch.
The growth of legitimate streaming services has driven overall revenues up in South Korea and
Sweden.
The possibility that music-streaming websites will turn CD buyers into freeloaders is a concern
only in countries where people still buy music. That is not the case everywhere. Rampant piracy
means just $19m-worth of CDs were sold in China last year—about the same as in Hungary. In
such countries it makes sense to give away music, surrounding and interspersing it with
advertisements. Websites like Top100.cn and Google are doing that. Record labels have also
licensed music to Nokia, which bundles it into the price of its mobile phones.
4 The proliferation of FM radio and multichannel television in emerging markets is also driving
revenues from copyrights. At the same time, restaurants and clubs are being strong-armed into
paying for the music they play. CISAC, an umbrella organisation for collection societies, has
reported steady or rising receipts in the past decade (see chart 2). But there is still a long way to
go before collections reach European levels in emerging markets or elsewhere in the rich world.
In America, for example, radio stations do not pay performance rights, although there have been
legislative efforts to change that.
Rising income from live performance, merchandising, sponsorship, publishing, online streaming
and emerging markets has come to counterbalance losses from declining CD sales. As a result,
some musicians are singing a different tune. Last year a new group, the Featured Artists
Coalition, objected to government plans to punish file-sharers by suspending their broadband
connections. Its leaders, including established artists such as Billy Bragg and Annie Lennox,
argue that file-sharing is a useful form of promotion. But not everybody agrees.
The sharpest rebuke came from Lily Allen, a songwriter and pop singer who was then 24 years
old. File-sharing was fine for long-in-the-tooth bands that “do sell-out arena tours and have the
biggest Ferrari collections in the world”, she noted. But for new acts it is a calamity. As revenues
dry up, record companies are becoming unwilling to invest in young artists, apart from those
who have built an audience by winning talent shows on television.
Ms Allen’s intervention went down badly with the digital libertarians who dominate discussion
of file-sharing on the internet. She was nonetheless right—and she could have gone further.
Music piracy is fundamentally a generational issue. Polls have consistently shown that teenagers
and young adults are the most likely to acquire music online illegally. They naturally prefer
music made by people of their own age (such as Ms Allen), who write about the sort of things
they experience. So the young steal from the young, while middle-aged fans continue to buy CDs
put out by middle-aged musicians.
5 City with no children in
In a sense, the recorded-music market is not so much dying as greying. In 2002 people aged 12
to 19 accounted for 16.4% of all spending on albums in Britain, according to TNS Worldpanel.
That was almost double the share of people aged 60 or over (8.8%). The two groups have now
switched positions. By 2008 teenagers accounted for just 12% of spending on albums, whether
digital or physical. By contrast, the older fans’ share had gone up to 13.8%. The over-60s do not
just spend more on music albums than teenagers. They spend more on pop-music albums.
The consequences can be seen in the pop charts. America’s bestselling album since 2000 is “1”,
a collection of Beatles hits from the 1960s. At one point last year four of the top ten albums in
Britain were Beatles recordings and the number-one album was a collection of songs by Vera
Lynn, who was then 92 years old. The bestselling album worldwide last year was “I Dreamed a
Dream” by Susan Boyle, a middle-aged Scot. Universal Music’s bestselling album in Japan in
the first half of this year was “Vocalist 4” by Hideaki Tokunaga, Japan’s answer to Harry
Connick Jr. If most of your fans are middle-aged, CD sales are holding up well.
The ageing of the recorded-music market has been accelerated by trends in retailing. As
independent record shops and specialist media stores like Zavvi (formerly Virgin) have closed,
supermarkets have emerged as leading outlets for music. Britain’s four big supermarkets—
Tesco, Asda, Sainsbury’s and Morrisons—accounted for 24% of all music sales in the country
last year. By comparison, Amazon.com had 13% of the market and iTunes only 11%.
Supermarkets are patronised disproportionately by the middle-aged and the old (see chart 3).
People aged 40 and over account for 62% of spending on music in Tesco, according to Kantar, a
research firm. Partly because of their clientele, partly because supermarkets are mass-market
enterprises, they tend to stock mainstream fare. “People who are shopping for Midlake or The
6 National won’t find them in a supermarket,” says Geoff Taylor of the BPI, referring to two
American indie bands. “But I bet Kylie Minogue’s album is there.”
The growing clout of middle-aged and old listeners extends beyond recorded music. “Many of
the acts selling out stadiums are old,” says Rob Hallett, the president of international touring at
AEG Live. The top three American touring acts last year were U2 (average age: 49), Bruce
Springsteen (61) and a double bill of Billy Joel (61) and Elton John (63). And that raises a
worrying question: what happens when their knees give out?
Springsteen’s still the boss
Many of the acts that now draw huge crowds emerged in an era of multi-album record contracts,
lavish marketing and radio payola. They built their brands gradually, overcoming the occasional
lousy album. They “invaded” other countries when they felt the time was right. As a result, they
have legions of fans who are prepared to stump up for concert tickets. Because their songs appeal
to several generations of listeners, they are attractive to advertisers and TV programme-makers.
The young dreamers in shows like “The X-Factor” commonly perform songs that are more than
a quarter of a century old.
Some music executives fret that the stadium-filling acts will not be replaced. It is true that the
starmaking machines run by the record companies are creaking. But this does not mean there will
be no more popular acts. Musicians will build fan bases in other ways—through social networks,
by recording music for TV or simply by trekking from gig to gig (which is how bands became
famous for much of the 20th century). Some will rise with a speed that would have shocked their
predecessors—witness Lady Gaga or Justin Bieber, a 16-year-old singer who was almost
unknown a year ago. Those who doubt their staying power may wish to consider that adults have
long believed the music their teenage children listen to will not endure as long as the tunes they
grew up with.
7 TWR Questions:
1. What type of market do stadium-filling acts operate in? Explain fully.
2. The article states that the economics of music has shifted from recording to music
publishing. Yet there is a huge audience for free music streaming services. So
people still love to listen to music and see live performances but are unwilling to
pay much for the former but clamor for tickets to attend the latter (depending on
the group). How do music companies make money and increase revenue given
this type of environment?
3. Ticket prices for live concert performances continue to increase and concert ticket
sales in North America are approaching $5 Billion. Revenues have increased
every year since 1995. Is the Law of Demand being violated here? As ticket prices
increase shouldn’t the quantity of tickets sold decrease?
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