U.S. album sales are down 13% through May 10 and industry insiders and watchers are wondering what can close the gap and end the slide of recorded music revenue. CD sales are down 19.3% during this period, translating to roughly $270 million in lost revenue this year and leaving a $162 million revenue gap, when taking into consideration other revenue streams, according to Billboard analysis (a breakdown is listed at the bottom).
That deficit is huge and recorded music companies are desperately trying to counter losing CD sales to digital sales, and album sales to track sales, with products or services that can make up the difference.
So what can help fill the revenue gap? The answer is a piecemeal collection of marketing and pricing strategies, multi-rights contracts and performance royalties paid to the owners of sound recordings. Also on the horizon are revenues from multi-rights contracts (currently immaterial but expected to be of consequence in a few years), in-house artist services, and acquisitions or market share gains in music publishing.
Pricing is an area with great potential. One alluring aspect of pricing is that it offers improved margins on sales that are already taking place. No new products or services need to be created in order to realize these gains - the demand already exists. Variable pricing at iTunes and other download stores is only the start. Dynamic pricing, though not ready to be widely implemented, definitely holds promise. Direct-to-consumer sales, because of the ability to tailor packages and prices for a variety of different levels of consumer interest, also has potential to grow revenues and margins.
Bundles used to take the form of an album. Now the Internet allows for the sale of many different kinds of bundles. iTunes is filled with premium versions of digital albums. Many bundles contain exclusive content. Others feature digital liner notes, lyrics and videos. Popular songs can be bundled together in ways other than traditional "greatest this" packages. For years, Warner Music Group's Rhino Records, for example, has packaged its artists' songs in five-song bundles called "Rhino Hi-Five." The iTunes Pass is a more recent example of a new type of bundle meant to convert some track buyers into album buyers. This bundle offers an album plus a number of additional, exclusive tracks that are given a staggered release.
The implications of improving the sale of bundles are great. Most importantly, bundles allow labels to discriminate based on a consumers' level of interest -fans place widely different values on the same product. By addressing the existence of different segments within the same fan base, labels can capture more of the potential revenues. The album format will continue to slide in popularity, but well-marketed bundles can provide small, incremental revenue gains. Those gains can be achieved by improving the quality of bundles, finding alluring product mixes to present as bundles, and continuing to enlist the help of retailers to push bundles over individual track sales.
Performance royalties for terrestrial radio stations is a gap-filler with potential because it does not depend on an increase of consumer transactions. A royalty of 3% of gross revenue would bring in hundreds of millions of dollars for record labels. Publishers currently receive around $400 million to $500 million in performance royalties. Since the addition of a new expense - the royalty - is likely to induce stations to play less music, the amount paid to record labels could be lower than what is currently paid to publishers. Publishers, and their parent companies, would be negatively impacted by a reduction in the amount of music played. The bill was recently passed by the Senate Judiciary Committee and will be put to a vote in Congress. People throughout the industry believe that performance royalties, if passed, could be phased in over a number of years.
There are ways to fill the gap outside of transactions and expected performance royalties. Licensing revenue, for example, is on the rise as labels increasingly put songs in advertisements and television shows. Revenue from multi-rights contracts, though currently a tiny part of a company's total revenues, will begin contributing more meaningful amounts in the next two or three years.
The deficit calculation:
Here's the gap math: - $270 million (CD sales lost this year) + $119 million (digital tracks gain thus far in 2009) + $33 million (digital albums) -$65 million (mobile downturn in 2009) + $18 million (boost in performance royalties) = - $162 million.
That's quite a deficit. What incremental revenue would fill that gap, assuming only existing recorded music streams were relied upon? Any one of the following:
-- An additional 232 million track sales, or 12.9 million tracks per week (a 50% increase over April's per-week average).
-- An additional 23.2 million digital album sales, which is almost twice as many as have sold.
-- An $10 upgrade to deluxe edition from regular addition on over four out of five digital albums purchased.
-- An additional 32.5 billion on-demand audio streams at $0.005 per stream. That is 2.17 billion hours of music at four minutes per song, an amount that would require so many hours of listening that far fewer people would have the time or inclination to purchase music.
-- An additional 23.5 billion hours of Internet radio, calculated at $0.00045995 per stream and four minutes per song. That comes out to about 6:30 of additional Internet radio listening every day for one year by 10 million people, or just over nine hours a day for one year if they only listen at work (assuming 260 work days per year). If 50 million people listened to those 27.4 billion hours of Internet radio per year, each would have to listen to an additional 1:48 hours each work day. (The ability of webcasters to pay those royalties is a different issue.)