10 January 2006

Digital Music Sales

Couldn't let this pass without comment.

In December, some sites reported on statistics seeming to show that growth in digital music downloads had stalled. Now, it seems the opposite. Two reports and analysis today from ars technica and in Macworld UK seem to show that there has been significant growth year on year - culminating in an incredible December. The December performance is put down to lots of iPod owners also getting gift tokens.

Now indeed, 147% annual growth is not to be sneezed at. Indeed, ars technica uses some clever techniques to show the growth in market share from 2.3% to 7.3% - a 220% increase from 2004 to 2005. But I'm not sure I think this performance is cause for celebration. Here's why.

By the end of 2004, there were, say, 10million iPods in circulation. Sales this year were at least 24-28 million. So there should now be 34-38million iPods around. That's growth of at least 240%. So growth in downloads has not kept pace with growth in iPods.

Fair enough, there are arguments against such analysis. You might argue that iPods are not the only players, and that downloads don't require an iPod. You might also argue that the newer iPod users are probably lower down the music purchasing league than the keen early adopters. And all these points are valid.

But set against this, I would argue that if digital music was successful, then it should be benefiting not just from the extra owners of iPods but from greater market share among existing owners. And if the argument that it is keen music fans who have adopted iPods and other portable players is true, then surely these people would be the ones who were purchasing most music online?

Taken another way, I think I know less people who DON'T have an iPod than I know people WITH an iPod (excluding extreme age groups). iPod penetration therefore is pretty high among the music loving population. What is therefore amazing to me is that market share of digital music versus physical is only 7.3%. That means 92.7% of purchases are physical. If we assume half of music lovers have a digital player, then the vast majority of purchases made by those people are still physical.

Finally, it should also be pointed out that there are a lot more music stores around - the industry has matured a lot in the last 12 months, so, that extra choice should also have helped growth exceed the figures given. Indeed, for some of 2004, even Apple's store was not available in the UK, and at first did not have a large choice.

So, I'd say that digital music is far from a success at this point. And I think the reasons are pretty obvious.

1.Even assuming I live in some extreme demographic (financially comfortable, audiophile....) I'm still a tight b***ard. Digital music is still too expensive. From a UK perspective an album price of £7.99 is about the same I pay on Amazon or CDWow, and indeed some material is quite a bit more on the iTMS (if I can get it!). While 79p is still pretty good value by track, no wonder albums are not selling well - it's not just that people can pick and choose. If you want the album you'd be mad to get it digitally. The labels think that they can still set prices individually in each country. But they can't. I've had albums delivered from Hong Kong, and the US all within the £7.99 price point no extra taxes and including shipping. There is a global price now for physical music. And, you know that's a GOOD thing (I'll experiment a LOT more at that price).

2. Digital downloads are still comparatively low quality. If I have the choice at the same price between physical CD quality which I can store losslessly, or 128kbps AAC, it's pretty obvious. Now if the labels throw silly DRM around CDs (I think they might have learned their lesson from Sony), maybe that changes the equation. But putting more restrictions on physical music is not going to have a positive effect. Sure there's a convenince angle of online purchases, but if the quality isn't there, I'm going to be very selective when I buy such material.

3. Longtail phenomenon*. While this is also a price issue, there's an availability issue too. Digital music is perfect for older material. If you ship hundreds of copies of a chart-topper there's a certain economic that's wildly different from shipping one-off copies of some old David Bowie CD to record stores dotted around the country. The price of such CD's is often less - bargain bins, making the economics worse. Yet, on all digital services, such albums (if available) cost the same as other albums, yet they carry an indentical profit margin to the chart topper. Why can't I buy the 200 odd vinyl albums we have in digital format at knock-down prices? I've spoken with others about this, and I know it's not just me. Artists would get a sudden inrush, labels would sell more, and we'd all be happy to rekindle a love of an old album. (Note, I don't blame Apple for this, record companies have the option of reducing price of an album - see the US music store for evidence of this. Apple has merely set a top end price).

4. Give me the complete package. For God's sake why do you not get the cover in pdf format? Or why don't we get access to the lyrics digitally too? I'm afraid when I buy digital music I feel I'm getting less for my money in too many ways.

5. Lack of innovation. Sure, there are a few nice things on these digital music stores - recommendations, celebrity playlists etc, but can't we have more innovative ideas? Why don't labels make use of RSS for instance to tell you about a new impending release? (I know one or two do a little, but it's far from widespread). There also could be far more done with special material - 12" mixes, covers etc. Why not include a video or 2 for a full purchase album? What about easy links to concert information (or even live online concerts tickets to which you get by purchasing a complete album or whatever). What are you waiting for?

Unlike others, I don't think the failure is down to DRM - though it's eventually going to cause a halt in growth and upset many people. But right now, the consumer is not getting a great deal from digital music. I cannot see a scenario whereby digital exceeds 15% of market share unless things radically change in this regard.

In some ways, I'm not sure the record companies really want digital to succeed. So, I'm not sure how unhappy they'll be with this situation. But they should be. They're losing sales of physical material which are not being replaced by digital. I know that I buy a LOT more the lower the price, and I'm sure many people are like me. If you want to increase the quantity sold guys, then buck up your ideas!

* For those unfamiliar with the term "Longtail" it refers to the suitability of digital distribution methods to deal far more effectively with the large quantity of recordings which sell in very low quantities - whether arcane new recordings or older popular ones.

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