Disrupting the Music Industry
Perhaps no industry has been more impacted by the revolutions of the digital era than the music industry. Digitization, modification, replication, distribution, and personalization have caused significant changes in the industry, some for the industry’s good, but most causing major damage to the industry.
We can think about the impacts on every step in the music value chain:
Composition → Performance → Recording → Distribution → Consumption
When we think of music composition, we may envision Mozart sitting at a piano in Vienna, picking out a melody line, then quickly jotting it down in musical notation on a treble clef. I’m sure there are many songwriters that still similarly capture their creative works, but in the digital era, composition is a much more broadly defined activity with microprocessors involved throughout. At its simplest, composing a song today may involve a digital piano connected via a MIDI (musical instrument digital interface) cable to a laptop computer. As the composer plays, software on the laptop transcribes the notes played into a musical score. Later, the composer can easily make changes to the score and hear the computer play the modified version. More commonly the composer will use a variety of tools including recorders, samplers, synthesizers, waveform editors, trackers, sequencers, and mixers to patch together an entire virtual band or orchestra before automatically generating the musical scores. The entire process is faster, easier, requires less, and produces more than the composition process of 50 years ago, all thanks to digital tools.
Similarly, music performance has been significantly enhanced by digital tools. Digital synthesizers, samplers, and sequencers can dramatically expand the music that can be produced by one or a few people. Digital tools can also help make music traditionally made sound better with digital effects (like a digital effects guitar pedal), digital filters to clean up the sound, or even an auto-tune system to correct the pitch of off-key notes.
Recording music has also improved dramatically through digitization. Instead of setting up microphones in front of guitar amplifiers and having a band thrash through take after take of a song, hoping for a version that everyone can be proud of, today the signals coming from the instruments are captured digitally and stored as tracks that can easily be tweaked and mixed together. In fact, all of that can be done using Digital Audio Workstation (DAW) software on a laptop. Combining together the composition, performance, and recording advances, a creative teenager realistically can write, play, and record a masterpiece in her bedroom without her parents ever having a clue.
But, it’s when we get to music distribution that we get a sense for the truly disruptive forces of the microprocessor, Internet, and mobile/social revolutions on the industry. Initially, digitization gave a boost to the music industry, providing a highly profitable new product in the compact disc. CDs were easy to produce, provided a high quality product that didn’t degrade with repeated playing, and were a good form factor for shipping and retailing. The number of “records” sold by the industry more than tripled from 1974 to 1999 with CDs dominating shipments.
However, as computer software made it easy to “rip” songs off of CDs as digital files that could then be easily copied and shared with others, digitization became a monster that threatened to consume the entire industry. By 2008, the sale of physically distributed recorded music had fallen back to the levels reported in the 1970s. The dramatic reversal in 1999 can easily be traced to the launch of Napster in June of that year. That free service made it easy for strangers to share digital music files with each other. Suddenly, anyone could get almost any music for free. Although the music industry was able to get Napster shut down in 2001, it was technically easy for copycat services to pop up faster than industry lawyers could get injunctions to shut them down.
Not until Apple launched the iTunes Music Store in 2003 did the industry start to figure out how to make money off of Internet-based distribution of digital copies of their recorded music. New business models have continued to emerge with music streaming providing almost half of industry revenues in 2018. The industry is back into growth mode (growing almost 10% in 2018), but from a much smaller base, and physical product sales continue to decline.
The consumption of music has also changed. When we were young, we listened to music on the radio. When we’d heard the new songs by any given band enough times to fall in love with the music, we might make the hard decision to spend $10 to buy their latest album at the record store. We’d listen to the album from the first to the last song on each side of the album. If we bought the cassette, we could take the music with us, listening in our cars, through our Walkman, or blasting from our boombox as we played basketball with our friends.
Today, we may still buy an entire album. We might even listen to it from beginning to end. But we’re more likely to buy a subscription to a streaming service like Spotify or Apple Music. Even with a premium subscription, we’re only spending $10 a month and we have access to more good music than we could ever listen to. We can listen wherever we go on whatever device is handy — our car audio system, our TV, our computer, our smart speaker, our smartphone, or even our smart watch. Arguably the quality of the recording isn’t as pristine as we enjoyed when we were buying CDs, but we have more control, more choice, and more convenience. The streaming services learn what we like and recommend music we might otherwise never hear. Clearly consumers have been the big winners in the digitization of music.
These changes have dramatically impacted the structure of the industry. What we think of as the music industry can be subdivided into three sub-industries: music licensing, recorded music, and live music.
In the twentieth century the industry was dominated by recorded music. Recording artists would tour and perform live, but often as a loss leader to drive sales of their CDs and cassette tapes. Licensing was a steady business-to-business revenue stream for the industry. One interesting dynamic was that radio stations paid licensing fees that went to the music composers and publishers but not to the performing artists and record labels. As with concerts, the artists and their labels viewed broadcasts of their songs not as a direct revenue source, but as a driver of physical product sales.
Now, in the twenty-first century, everything has changed. Licensing revenues have more than doubled and recorded music revenues have plummeted. As the consumption of physical music products has declined, and as music has been licensed to websites, movies, video games, and streaming services, performing artists have had to fight for their share of licensing revenues. While licensing has become the most profitable segment of the industry, live music has become the biggest. Concerts are no longer a loss leader, but instead artists view new releases as a way to bring people out to their shows where they’ll spend money on the ticket and probably some merchandise (t-shirts, stickers, physical CDs, etc.).
In fact, all of these changes have enabled some musicians to build their own business independent of the traditional industry. They use crowdfunding sites to finance the creation of new music, record the music on their laptop, and distribute their creations through a variety of digital platforms including their own website, Bandcamp, and even Spotify. This grassroots approach can create a more intimate relationship between the artist and their audience.
In short, the music industry looks dramatically different from 25 years ago, with changes in industry structure, revenue models, and consumption patterns, all driven by the three digital revolutions.
