There are significant changes in the way music is being produced, distributed, sold, and consumed today, with a marked shift in consumer preference from the physical format — the compact disc — to “digital-only” music that is streamed or downloaded to a device such as an MP3 player.
According to the International Federation of the Phonographic Industry (IFPI), there are more than 500 legitimate online music retailers in 40 countries, accounting for up to 30% of global music sales, typically in digital formats only. A staggering 80% of all releases worldwide are now offered online.
Victoria Bracewell Lewis Sr. Analyst, Forrester Research
This shift in preference has already seen digital music sales rise 71% in 2006, and is likely to see another 62% surge in 2007, with revenues touching $2 billion. According to Forrester’s own estimates, the market for legal download of music will grow to 36% of all European music sales by 2011. In comparison, global CD sales are down 20% this past quarter. The seven-year decline in CD sales persists, with some estimates suggesting that overall physical music revenues are down 25% from a year ago.
The net result: established retailers are going bust. US-based multinational music retailer, Tower Records, closed shop for good this year. Its fate has been shared by several independents in Europe, Australia, and Japan, the world’s second-largest consumer of music.
Over the past four years, the majority of music retailers on the UK high street have failed: Andys Records, MVC, Music Zone, and Fopp have all gone into administration. HMV and Virgin Megastores are the only national chains to survive. Even Carrefour, France’s biggest retailer, has admitted it doesn’t make money on the CDs it sells within Europe.
What’s really going on?
At the root of this shift to digital-only are certain market realities. For starters, portable digital music devices allow consumers to download just the singles they like, and not buy the whole CD. Online single-track sales say it all, with downloads totaling nearly 795 million in 2006, up 89% on the 420 million singles sold in 2005. The US rang up the majority, with 582 million single-track digital sales in 2006, up 65% from 2005.
Secondly, increasing numbers of independent labels and musicians are going into business on their own and launching Web retail outlets. This gives artists more direct control over their brand, promotion, placement, pricing, and the resulting revenues while leveraging their fan base. But this comes at the expense of the major labels and retailers.
Musicians have also been known to devalue CDs by giving them away. The release of Prince’s new CD, Planet Earth, as a free giveaway with a UK national newspaper bypassed both traditional retailers and the Internet. Three million people picked up the CD for the cost of the newspaper: £1.40 ($2.80). While the rock star’s action created tremendous hype and media attention, it also raises questions about what value is placed on music.
Then, social networking sites such as MySpace and Bebo are changing the way people find, recommend, search for, market, and sell music on a global scale. By its very nature, social networking bypasses traditional distribution channels. This means the record shop has lost access to valuable relationships with the consumer.
Lastly, illegal downloading continues to be a problem. Estimates indicate illegal downloading outpaces legal 10 to 1 and, according to Forrester data, 20% of online Europeans regularly download music, but only 2% have ever paid for it. When people do decide to acquire music honestly, many still buy CDs, but choose to purchase online.
It is inevitable the marketplace for retail music will undergo a near-total transformation the next five years, and retailers that don’t change their business model will fail. More than 1,700 in the US have ?led for bankruptcy or simply closed down over the past seven years, according to the Global Entertainment Retail Association. Half that number shut down in the UK during the same period.
With the proliferation of free music sharing and services, either through social networking or sites like Napster, consumers will gradually become less willing to pay for what they want to hear.
Discount retailers will continue to gain at the expense of music-only retailers. Cheap music still brings in foot traffic for non-music retailers like Tesco, Wal-Mart, and Best Buy.
Out of tune responses
Looking at how retailers have responded — or have failed to respond — makes it clear why Tower Records hit bankruptcy and why others like HMV are struggling. In response, the three typical strategies among traditional music retailers have been:
» Burying their head in the sand. Many retailers, particularly independent businesses like Fopp seem determined to simply hang in there and keep doing the same old thing. This is either because they believe what worked before should work again or because they simply don’t know what else to do.
» Shrinking the shelf space for music. Large retailers like Virgin and Wal-Mart have reallocated shelf space, replacing CDs with other products such as games, DVDs, and portable music players. The problem of this seemingly logical response is that the demand for CDs hasn’t completely dwindled, but the shrinking availability of CDs will further hasten the death spiral of CD-driven business.
» “Let’s go digital!” Some retailers, such as Mediamilkshake in Denmark, have built their own Web sites to promote and sell CDs and digital music. Others, like CD Warehouse and Universal Music Group, have gone to eBay and Amazon.com to sell music. But moving online can be a costly affair pouring money into an online effort isn’t a guarantee of success. Music Land went online in 2004 with the launch of graze.com; two years later, it went bust due to increasing competition online, poor channel and systems integration, and a failure to control access to and relationships with the consumer.
The good news is that despite the demise of the CD, the demand for music from consumers has never been so high. Strategy professionals at retailers have been taking the wrong approach to market changes; and what the market is experiencing is not so much the imminent death of CDs but that of outdated methods of selling physical music within the retail environment. To get music buyers back in the shops, strategy professionals and channel managers need to adopt radical new ways of doing business.
» Diversify, diversify, diversify. This isn’t only about stocking non-music products such as T-shirts, electronics and books. It is also about diversifying the way of and format for selling music. For example, offer the customer an on-demand service, not unlike mobile phone top-up services, accessible online and in-store through kiosks. This creates a cycle of sales growth that provides continual predictable revenues, encourages increased types of points of sale (POS), and generates repeat customer visits. Attaching a loyalty programme to the on-demand service will give customers further incentives to use it and provide another opportunity for cross-promotion. An example of this can be found at Germany’s largest music retailer Saturn, which installed interactive music service kiosks, called the Dome, throughout all its shops and integrated them with its online music site.
» Focus on the in-store customer experience. Create a customer-centric environment in-store and online by understanding your customers’ needs on a personal level. Starbucks has never been just about selling coffee — and nor is Nike only about shoes. They beat the competition by making the store environment a destination in its own right. Nike and Starbucks customers are fanatical followers because they feel warmly welcomed in stores filled with interesting iconography, music, colour, and welcoming furniture. Regardless of the popularity of online social sites, the online world cannot replace the sheer excitement and buzz of a superb retail shopping experience. Music retailers should consider offering “refreshment zones” where customers can sip coffee while using in-store computers to play games, surf the Internet, and download music, as Borders Books Music Cafe or Rough Trade — one of the remaining successful London music chains — have done.
» Increase the availability of niche/specialty music. According to IFPI, billions of music tracks are now available online and in-store. The difficulty for today’s consumers is finding the music they like. Examples of best practices include extending the music product range to collectibles, such as vinyls and back catalogs, for which consumers are willing to pay higher prices. The success of the Amoeba stores in California supports the premise that not only will specialty music retail survive, but will even thrive when combined with these practices and a “customer experience” approach.
» Practice multichannel promotion. New media like Internet radio, podcasting, mobile music, and satellite radio are attracting millions of music-buying consumers. In France, Fnac, a subsidiary of the Pinault-Printemps-Redoute group, dominates music in-store and online sales through consolidation and savvy cross-channel sales strategies. Like Fnac, retailers should follow their consumers toward these new media in order to attract and retain their awareness. As consumers become more comfortable with the Internet, multichannel consumers are increasing in number. Because multichannel consumers demand a consistent voice from retailers for everything from loyalty programs and promotions to inventory visibility and availability, retail channel managers need to cross-integrate POS, eCommerce, and call center and in-store solutions.
» Cater to “wannabe” musicians. Music retailers should incorporate the needs of consumers interested in going beyond simply “buying” music to actually making it. Spurred by technologies that make it easier to create and record music, sales of digital recording equipment, musical instruments, and music lessons have doubled in the past decade to $7.5 billion. Product merchandise and service offerings should include musical instruments, sheet music, and related materials.
» Finally, develop a retail syndication model. Mubito, a Sweden-based online business, is one of a new breed within the online music industry. Like others in this category, such as eMusic in the US, the company is a network of official music Web sites that musicians and record labels build and maintain. The company provides the musician with a variety of online retail, community, and media services, such as promotional management, Web site maintenance, customer “fan club” database tools, and links to the music industry. What’s lacking is the physical retail element. This is where the brick-and-mortar retailer has a critical part in the new world order. By partnering with independent labels, musician services like Mubito, or even with the musicians directly, retailers can achieve a dual goal: lower-cost, higher-margin inventories for them and a brick-and-mortar distribution point for the label or musician.
Victoria contributes to Forrester’s offering for eBusiness, Channel & Product Management professionals. As an expert in eBusiness and using electronic channels for retailing, customer service, and product branding, her research focuses on understanding the dynamics centered around eCommerce, online merchandising and interactive marketing in EMEA and ermerging markets, eBusiness strategy and operations and multichannel trends.
Feedback to her column can be sent at Techstreet@livemint.com