How Technology is Changing the Music Industry (Video)

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Walk off the Earth
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Michelle Phan

Script

If you’ve been reading Art and Finance’s webcomic, Ilusion, you may recall a scene in Chapter 3, where Pablo introduces to Claurette to the concept of disruption, where, in his words, new technologies make our lives more convenient, often in the form of introducing a new middleman that gives consumers what they want in a more efficient manner.

Often this new middleman replaces pre-existing middlemen, causing disruption in the pre-existing structure of an industry. In this vlog, we’ll be looking at an ongoing, real-world example of disruption. Specifically, we’ll be looking at how technology is changing media, and, in particular, the music industry.

(Episode #8: How Technology is Changing the Music Industry)

According to Harvard Business School professor Clayton Christensen, “disruption displaces an existing market, industry, or technology and produces something new and more efficient and worthwhile.” That’s all well and good for end-users and consumers, but disruption can involve long, drawn out fights within an industry as established players are under threat of being replaced by newer players, while others have to adjust to new realities.

The music industry, one of the first casualties of the Internet and file sharing, is a perfect example of this.

As this chart from Quartz shows, global recorded music industry revenue has halved in less than two decades.

Music Rev

This is largely attributable to file-sharing services (think of Napster in the late 90s, early 2000s) and the unbundling of music albums with the rise of iTunes, where you can purchase individual track downloads.

One visible result of this disruption has been that musicians now have to earn money through other venues, such as increased touring.

And the disruption is not over yet. Streaming music, where you pay a fee to listen to an unlimited amount of music on an app, is ascendant, with tech company Spotify leading the charge. So far, year-over-year, streaming’s share of recorded music revenue has been increasing:

Streaming Breakdown b

Now, this COULD be a good thing for the music industry. After all, streaming subscriptions currently cost about $120 a year, more than what the average consumer used to spend on CDs and such in the past. Not only that, but the margins are actually better on digital music than physical music, due to lower distribution costs. In fact, Credit Suisse is forecasting a return to growth for the industry.

Streaming Breakdown c

So, what’s the problem, then? Why doesn’t the industry as a whole adopt music streaming? Is there a light at the end of this tunnel? Maybe. Or maybe not, for the following reasons:

  • Although subscriptions earn more, the payment, which is per stream, is stretched out over a period of time, rather than the large upfront payment of album sales. If you’ve read our piece on the discount rate in our Finance Blog, you’d know that a dollar today is worth more than that same dollar in the future. So that’s potentially an issue, and also a reason why some labels and artists haven’t been so keen on the idea of streaming music. Witness Jay Z’s attempt to get consumers to pay more for music with Tidal, or Taylor Swift’s public shaming of Apple that led it to pay artists for the free trial subscription of Apple Music. A great case study in public relations by the way. Jay Z asked the consumer to pay more, while Taylor Swift asked the middleman to pay more. The rest is history.
  • Intense competition. Spotify is not the only player in streaming music. And now, they have to deal with Apple with its recently-launched Apple Music. With intense competition comes a possible price war. After all, Spotify already has a free, ad-supported tier for streaming music. To make matters worse, so far, the economics of running music streaming don’t look good. Spotify isn’t earning a profit, and in fact nearly tripled losses from a year earlier. This is the sort of loss that Apple, with its deep pockets, can afford to take to keep its 800 million iTunes users locked into its ecosystem with Apple Music. Regardless, streaming doesn’t look attractive for musicians and labels if it just becomes a race to the bottom in terms of pricing. Moreover, as the CEO of Rdio pointed out, if different streaming services offer access to different musicians, it would just drive users away and into other platforms. One alternative is Youtube, where is music is by far largest category in terms of views from its one billion monthly users.
  • Lastly, and most importantly in our view, recorded music has been irreversibly devalued thanks to the Internet. If you look at the last few years, while it’s true that streaming revenue has grown, overall revenue for the industry has continued to fall. Free recorded music is just easier nowadays to access, whether it be through piracy or ad-supported platforms like Youtuhe and Spotify.

Streaming Breakdown d

So, what’s the way out? Are we facing a doomsday scenario where enough people DO NOT pay for music such that the industry shrinks and consumers are left with LESS music? Is that what we want as consumers?

To solve this issue, we need to take a step back and look at the bigger picture. First of all, for as much as the Internet has devalued recorded music, it has also either launched or helped the careers of a considerable amount of musicians. Secondly, many musicians do other things to make up for income lost from recorded music. We’ve already mentioned touring, but Rolling Stone came out with a list of other revenue-generating activities. The list includes:

Licensing

Instant Concert Recordings

Even a fashion line, like the case of Jessica Simpson. (Yeah, remember her?)

Which goes to show that you don’t have to be a starving musician in the Internet age. And this is only a tip of the iceberg – who knows what further innovation for content creation the future will bring.

What might be the case for musicians is that there will be more musicians making a comfortable living, thanks to the Internet and its power to reach niche markets, but fewer musicians that are multimillion dollar celebrities. At the crossroads where we currently stand, Jay Z and Taylor Swift may have to decide whether they want to be musicians or celebrities. The two words are not necessarily synonymous, especially in this day and age.

And here, in our opinion, is how the Internet has truly disrupted not just the music industry but the entertainment industry as a whole. The Internet is redefining what it means to be a celebrity.

Broadly speaking, the Internet is effectively replacing studios, producers, physical stores and the rest as the middleman through which we consume not just recorded music, but CONTENT in general. Not only has the Internet given us an easier way to consume content, it gives us nearly boundless CHOICE in what kind of content to consume. And sometimes, we end up consuming content we didn’t even know we wanted, as in the case of more non-traditional celebrities:

This kid makes over $1 million a year opening and reviewing toys.

This guy made $4 million in 2013 playing video games.

This CAT reportedly made $100 million in two years!

…Would any of this have worked before the advent of the Internet?

Thanks to how fast information travels, how interconnected we all are, and how powerful technology has become, the lines are blurring as to who gets to become a celebrity. Today’s Youtuber could be tomorrow’s multimillionaire (Michelle Phan). Traditional celebrities are become tech investors, and vice versa.

We live in a fast-changing world. Is the saying popularized by Andy Warhol true, that everyone would get his or her 15 minutes of fame? Or, depending on how they handle the fame, 15 seconds or 15 years? Who’s going to be the next celebrity? Is it me? Is it your friend? Is it… you?

Fin.

Hey guys, our next vlog will be out late July, in the meantime, please visit our site, artandfinance.net, for weekly updates to our webcomic on business and finance, Ilusion, as well as continuing updates to our finance blog. If you like what you saw, please support Art and Finance by subscribing via Youtube and/or social media, purchasing merchandise, or donating via Patreon. Links are in the description below. See you next time!

Ramon Rodrigo Cuenca, CFA
Equities Analyst
Art and Finance
Assistant: Mack Agbayani

Sources/Links:

Disruption Vs. Innovation: What’s The Difference? 

The music industry has hit its rock bottom

1000 True Fans

Taylor Swift and the Economics of Music as a Service

Why Did Taylor Swift Ditch Spotify for Rdio?

This is Apple Music’s 1 huge advantage over Spotify

Will Hollywood Be Unraveled by Unbundling?

Spotify tripled its losses in two years. Is music streaming over?

Nine Ways Musicians actually make money today

Apple’s deep pockets pose threat to Spotify in music battle

Spotify or Apple Music? Which streaming music service is right for you? 

Grumpy Cat Means Business

Why Taylor Swift Succeeded Where Record Labels, Indies Failed 

That’s Business, Man: Why Jay Z’s Tidal Is a Complete Disaster 

The Price of Music

This 9-year-old makes $1 million a year opening toys

Why 32 Million People Are Obsessed With ‘PewDiePie’

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