A music industry trade group recently announced that music sales rose for the first time in over a decade. After being pummeled by technology, particularly the Internet, it seems that a digital business model may finally be taking hold. That could mean good times ahead for music companies.
We’ve come a long way from the giant vinyl disks that spun on a phonograph. While those nostalgic items are still available, the compact disk was the big turning point in the music businesses’ decade long tailspin. The CD made music digital, digitization meant that music was just a computer file. Computer files are easy to copy and share. No more mix tapes, just copy and paste.
Apple Inc. (NASDAQ:AAPL) sped the decline with the introduction of the iPod. The first truly mass market digital music player. This created a reason to go digital. When the iPod music player morphed into the iPhone, music became even easier to port around and further increased digital music demand.
The first big battle for the music companies was the illegal copying and sharing of music. Clearly, if one person buys a CD and posts the digital files online for anyone savvy enough to find them, the music industry loses out on sales. The industry went into attack mode, suing people who were sharing music. That effort turned into a publicity nightmare and did nothing to help falling music sales, though many illicit music sharing sites did get shuttered.
Along with the iPod, Apple Inc. (NASDAQ:AAPL) created iTunes to sell digital music downloads. This created a complete ecosystem around the iPod, giving Apple the enviable position of controlling its customers’ entire music experience. And it gets a piece of every transaction. This is a benefit that still underpins Apple’s various products and helps it to maintain its market share. It is also a reason to start looking at the shares again after the recent sell off.
The big benefit for the industry was that iTunes got customers used to paying for downloading music.
Selling music, however, isn’t the only way that music companies make money. They also earn royalties from the use of music. So radio stations, movies, and television shows that include music all pay for that privilege. Web sites that stream digital music quickly popped up. These sites, like Pandora Media, Inc. (NYSE:P), are similar to radio stations except that they allow interaction with the music.
Pandora Media, Inc. (NYSE:P), for example, has created a proprietary database of interconnections between different music. So, when a customer requests one song or artist, the site automatically creates a “station.” This exposes users to new music that they otherwise may not have heard and does it in a way that is familiar and, hopefully, keeping within the customer’s tastes.
Typical of this model, a free service is ad supported with a subscription level being ad free. While it remains to be seen if Pandora Media, Inc. (NYSE:P) has a successful business model, the change in listening habits is notable.