Wondering where the record labels’ $24bn went?

April 18, 2013

It’s 2003 and Apple launches the iTunes Music Store. The un-bundling of the album format that started with Napster in 1999 has become official. The then ~$40 billion record music industry is on its way to ~$16bn within a decade.

The bigger point is that digital pays less, the margins just aren’t as good as physical. And the energy pored into digital produces fewer returns. So bore me with all the zero-cost, infinite distribution arguments, it’s just a low-margin format that doesn’t bundle well, doesn’t have the benefit of scarcity, and is far more prone to redistribution (also know as theft).

— Paul Resnikoff, Digital Music News on CD vs digital revenues.

The missing $24bn fractured in many directions:

  • albums distorted the natural music acquisition market and hence consumers gravitated to singles rather than (high margin) bloatware albums.
  • entertainment substitutes continued to gain market share.
  • some people then and to this day choose free over paid via “illegal” filesharing.
  • the app-conomy ;-) put a rather large nail in the recorded music revenue coffin (I realized this when I happily spent $5 on an app but thought twice about buying a song).

Plus subscription models continue to drive revenues toward zero, even for aggregated rights owners such as the recording labels who are the only entities for whom sub models make any sense (apart from Spotify).

All that said, I think that within roughly five years it will be clear how much of the $24bn was lost because the recording industry refused to do the hard work of monetizing the sharing economy. Suing BMG, who took a large stake in Napster in 2000, was always an absurdist Pyrrhic victory.

The Daily Gieselmann also takes into account data from iTunes: the App Store, eBooks, Movies and TV purchases. (Gieselmann [of e.ventures] says he’s not that interested in music, which is why the dashboard doesn’t also track music sales.)

— TechCrunch, VC firm e.ventures makes its internal tracking tool available to all

I often get asked about rights deals with the music industry, particularly as they relate to my startup. I’m with Tom Gieselmann. It’s way too hard, with too much cash needed up front for so little return, when one can prove MVP with other entertainment rights sectors.