Seizing The Digital Opportunities: New Avenues Exist To Maximize Revenue Potential

When we participated in the Billboard Music & Money Symposium last year, the outlook for the music industry was bleak: Unit sales were down 16%, and revenue had plummeted by more than 20%.

Shahid Khan is a managing director with BearingPoint, a business consulting and systems integration firm. Peri Shamsai is a senior manager with BearingPoint.

When we participated in the Billboard Music & Money Symposium last year, the outlook for the music industry was bleak: Unit sales were down 16%, and revenue had plummeted by more than 20%. The year saw early increases and more recently some declines in sales, with final U.S. unit sales of CDs for 2004 estimated at 1.6% higher than those of the previous year.

While there is hope that music sales are experiencing an upswing, it is increasingly apparent that individual players must attempt to buffer themselves as much as possible from the ebb and flow of the industry's economic cycles.

The recent increase in physical sales has buoyed industry spirits, but the real hope beckons from the digital arena. U.S. digital music sales have increased 617%, with total paid downloads reaching 136 million tracks in 2004. Significantly, digital downloads are increasingly replacing physical singles sales, which fell 37% in 2004 to 7.3 million units, representing only a fraction of track downloads.

Similar explosions in digital music sales occurred elsewhere in the world. In a survey of U.K. consumers, the British Phonographic Industry found that there were roughly 1.75 million downloads in third-quarter 2004, up from 660,000 in the prior quarter.

Both Microsoft and Apple Computer are launching stores throughout Europe and Asia, which will drive up international downloads even further. Sales of music by these legitimate services are being boosted by decreased illegal file sharing, staved off by lawsuits filed against individual file sharers by the Recording Industry Assn. of America and the International Federation of the Phonographic Industry.

Furthermore, music subscription services and ringtone sales are also resulting in millions, if not billions, of dollars in revenue. With U.S. Internet music sales predicted to reach $720 million by 2006 and global mobile music sales already estimated in the billions of dollars, there is clearly an opportunity to be seized.

The future success of individual players is increasingly determined by a bifurcated strategy of a strong release schedule and an effective digital market presence. While the former is clearly the centerpiece of the industry's focus and expertise, the latter can best be attained through leveraging learnings from a variety of digital technology players as well as those from other relevant industries, including film, TV, information services, videogames, cellular services and software. These learnings can be leveraged to position music and publishing companies and collection societies to maximize their profits from the digital arena.

Recent developments in the digital infrastructure space can help labels and digital music companies maximize their profits and position themselves as industry leaders. Many new technology providers have developed and implemented applications that assist the music industry in maximizing the revenue potential from this growing market. These applications include:

  • Sophisticated document and rights-management systems that can allow rights owners to support the escalating complexity, diversity and volume of rights acquisitions in the digital market.

  • Robust digital-asset-management solutions that can enable content holders to create, store, access and deliver their assets to minimize costs and maximize revenue from the increasingly complex product delivery life cycle.

  • Growing numbers of outsourcing solutions for the manufacturing and distribution of physical products. Such services allow companies to focus on their core artist-development business while enabling significant cost savings and protection against the impact of the digital replacement of physical goods.

  • Marketing-effectiveness systems that allow labels to better target their offline, online and wireless marketing expenditures. Such systems enable easier tracking of marketing expenditures, thereby providing greater insight into the return on these large spends at a time when marketing channels are becoming more fragmented.

  • Upgraded financial processing systems that can address the fragmentation and complexity these new forms of exploitation introduce, including the move from product-level to track-level calculations, the expanding diversity of third-party deals and a rise in the volume of third-party licensers.

  • Third-party licensing systems that support the increasing volume of requests for licenses from third parties. Such systems can partially or even fully automate the licensing process, thereby maximizing the returns from these companies' underlying assets.

All of these applications require consistent data taxonomy applied across the entire product/copyright portfolio. The organizational impact of addressing these new challenges is large and can best be met through the support of an organizational change program that helps the business shift to a new, more flexible model. Increasingly we will see a variety of music players announcing individual initiatives to capitalize on various parts of the digital-music value chain. Whether through innovative licensing strategies that enable broader exploitation of assets, strategic alliances with game manufacturers or new product life cycle management solutions, they will all be driven toward the diversification and expansion of their existing revenue streams. As these business applications mature, the music industry landscape will shift from a highly consolidated number of like-minded players to a more fragmented number of diversified product and service offerings. As such, the strategies quietly being put in place today will determine each company's positioning for tomorrow. New applications, business processes and organizational programs are required to migrate the record and music publishing companies to a more flexible operational model -- one that is capable of seizing the opportunities of the digital age. More important, each company's digital strategy and activities will increasingly define its future business positioning and offering. By liberating these companies from the demands of inefficient systems and manual and redundant processes, these tools can allow music companies to focus on their core business -- the creation and marketing of great music -- while enabling them to take advantage of the more varied means of getting their artists' work into the hands and ears of music lovers around the world.