Music industry develops new business models 

Source: Chris Martin, lead singer of Coldplay

The music industry is transforming its business models in a bid to earn money in an environment where 95% of music downloads are illegal and not paid for.

A recent report by the international recording organisation IFPI shows that the digital music business saw a sixth year of expansion in 2008, growing by an estimated 25% to US$3.7 billion ($NZ6.7 billion) in trade value.

It shows an industry that has shifted its approach from one based only on unit sales of music to "monetising" access to music across a multitude of channels and platforms. Digital platforms now account for around 20% of recorded music sales, up from 15% in 2007.

At the same time, a new generation of music subscription services, social networking sites and new licensing channels are emerging. These were led in 2008 by services like Nokia Comes With Music, MySpace Music and a raft of partnerships with Internet Service Providers (ISPs), such as TDC in Denmark, Neuf Cegetel in France, TeliaSonera in Sweden and BSkyB in the UK.

Single track downloads, up 24% in 2008 to 1.4 billion units globally, continue to drive the online market, although digital albums are also increasing (up 36% in 2008).

"The recorded music industry is reinventing itself and its business models. Music companies have changed their whole approach to doing business, reshaped their operations and responded to the dramatic transformation in the way music is distributed and consumed," says IFPI's chairman and chief executive John Kennedy.

However, despite the growth in legal music downloads, the music sector is still overshadowed by the huge amount of unlicensed music distributed online. IFPI estimates over 40 billion files were illegally file-shared in 2008, giving a piracy rate of around 95%.

In France in the first half of 2008, album releases by new artists fell by 16% and local repertoire accounted for 10% of albums, compared to 15% in the first half of 2005. In Spain, just one new local artist featured in the Top 50 albums from January to November 2008 - compared to 10 in 2003.

Kennedy says ISPs play a key role in protecting intellectual property rights.

"There is a momentous debate going on about the environment on which our business, and all the people working in it, depends. Governments are beginning to accept that, in the debate over "free content" and engaging ISPs in protecting intellectual property rights, doing nothing is not an option if there is to be a future for commercial digital content," he says.

In France, a draft Creation and Internet Law sets up a system of "graduated response" by which ISPs will write to persistent copyright abusers to educate and warn them about their actions, as a last resort sanctioning them with loss of internet access for between one and 12 months.

Research by Entertainment Media Research suggests the graduated response scheme will be effective, with 72% of UK music consumers saying they would stop illegally downloading if told to do so by their ISP.  A similar number of French consumers agreed internet account disconnection would be a better approach than fines and criminal sanctions.

Zealand will start requiring ISPs to implement a policy of terminating the accounts of repeat infringers in February.

Meanwhile, companies are continuing to evolve to meet the market and drive revenue.

Advertising-supported services that are free to consumers are opening up. One of the highest-profile moves in this area was the launch of MySpace Music in the US in September 2008. Several leading music companies have also signed licensing agreements with YouTube, the global market leader in video streaming.

A-la-carte music downloads continue to grow, with AmazonMP3 joining the European market, broadening consumer choice. An increasing number of stores are licensed to sell DRM-free music tracks. In January 2009, iTunes, the leading download store, announced it was making eight million DRM-free tracks available at flexible pricing points.

Music companies are also increasingly licensing music to third parties. One notable success is the games sector where music games were responsible for 15% of overall game sales in the US in the first half of 2008 according to NPD Group.