Redmond Blog

An inconvenient truth: Physical formats capture 80% of the album market

The calls from aggrieved ERA members started within minutes of the BPI pre-BRITs sales announcement the other day.

"Brainless" was one of the more heated comments.

The cause of their ire was the relentlessly pro-digital tone of the BPI statement about
annual record company revenues.

It concentrated almost solely on the growth of digital revenues, though these remain less than half the value of revenues from physical product.

It highlighted the growth of subscription services, now worth £24m, certainly creditable but, to put them in context, less than one twentieth of the value of the CD album market.

Physical formats were referred to only in terms of their declines, but the statement managed to omit the fact that physical formats accounted for over 80% of albums revenue in 2011 - some 10 years after the beginning of the digital music revolution.

ERA is a broad church and its membership includes many of the key innovators in the digital music market and so as an organisation it is certainly not anti-digital. It is pro-digital and pro-physical.

It is probably fanciful to suggest, as some do, that the BPI is now actively discriminating against physical retailers and in favour of digital. It is more likely that the trade association simply wanted to promote a positive story ahead of Tuesday's BRIT Awards.

But with growing concerns that the physical market is declining at least as much due to a lack of commitment by suppliers as to lack of enthusiasm from consumers,
expect to hear more of this issue in coming weeks.

What price a punk classic?

The journey of the Sex Pistols' Never Mind the Bollocks from threat-to-the-world-as-we-know-it tabloid horror in 1977 to a lifestyle accessory in the picture frame department of John Lewis department stores is probably not so surprising.

If Johnny Rotten can advertise butter and Iggy Pop can do the honours for insurance, we've long since ceased to be shocked by the ability of one-time revolutionaries to be absorbed into the mainstream.

What is more striking is John Lewis's ability to command a price premium on this product.

Never Mind the Bollocks and the 19 other titles John Lewis is stocking alongside Art Vinyl frames costs £20 for the vinyl LP plus CD in slip case combination.

Contrast that with the current pricing of a Never Mind the Bollocks CD on roughtrade.com (£6.99), hmv.com (£3.99) and amazon.com (£3.89) or the price of the download on iTunes (£4.99) or amazon.com (£3.00) and the scale of disparity is clear: John Lewis is securing more than six times as much cash from the consumer for exactly the same music as the cheapest conventional music retailer.

The cultural value of Never Mind The Bollocks is a question for another day, but in terms of market value, John Lewis is doing something quite magical - it's taking something other retailers believe only to be worth £3 and selling it for £20?

How can they do this? And are there any lessons from it for the wider market?

***

I have worked with Art Vinyl's creator Andrew Heeps on and off for the past four years. From the beginning I was intrigued by the way that putting a piece of music - or rather a 12" vinyl sleeve - in a new context, a frame, could transform its perceived value.

Art Vinyl's Play & Display frames cost £39 direct from the AV website. A 'gift pack' which includes a vinyl album retails for £51.

The consumer seems to have little problem with these prices - the company's most successful SKU is a three-pack of frames which retails for £99. Yet what has been consistent throughout this period has been the scepticism and sometimes downright hostility of many in the music industry towards Art Vinyl's pricing model.

"It's too expensive," they say. "People will never pay that."

But of course they do. And over the past four years the company has sold more than 100,000 of its frames.

Art Vinyl's response has been to focus on other channels - particularly the design and interiors market. Art Vinyl frames have been stocked in Selfridges, they are in the Conran Shop, in the V&A shop and now, the biggest leap forward yet - in 24 John Lewis department stores.

Sure enough, when Art Vinyl approached labels about securing supplies of vinyl albums for John Lewis the issue of price came up again. "Are you sure? £20 is just too much."

Their scepticism is understandable. Music - like DVD - seems stuck in an endless downward spiral when it comes to price. At times it seems like the industry's only effective marketing tool is price-cutting.

The John Lewis thought process is somewhat different. It didn't set out wanting to sell music. It wanted to sell frames, and compared with other picture frame products, Art Vinyl is not particularly expensive.

But how to catch the eye of customers? You have to put something in the frame.

Hence for John Lewis music is simply an accessory for the frames. But 12" vinyl records take up a lot of space and so need to be priced at a level comparable with other items in the store, hence the decision to create a unique SKU which combines CD and vinyl LP in order to justify the higher price.

It's the exact opposite of what much of music retailing has become where the game seems often to be simply to buy and sell at the cheapest possible price.

***

There are three elements which allow John Lewis to achieve its £20 an album pricing.

First, the retailer brand. Just as traditionally HMV and strong independents have been able to claim a price premium for their service and product range, so too can John Lewis. The department store may be famous for its 'Never Knowingly Undersold' price offer, but cannily it seeks to sell unique, value-added products like the vinyl-plus-CD combination which simply aren't available elsewhere.

Second, context. Sell music in a music store and you cannot help being compared with other music stores. Sell it in a picture framing department and the context is far more favourable.

Third, and most importantly, it's not selling music, it's selling something much valuable, it is selling an expression of people's identity. Much like the ringtone business at its height which paradoxically was able to sell a 30 second clip of a song for more than a full track, Art Vinyl's flip frames give consumers a way of expressing who they are through music.

Stick the sleeve of Never Mind the Bollocks or Nevermind or Rio or the Velvet Underground & Nico on your living room wall and you're making a statement of who you are and how you want to be seen.

***

So what's the relevance of this for everyone else in the music business? Clearly not every record shop can become a picture frame store. But it is a reminder that there is another way, and it's yet further evidence that the old music industry rallying call 'it's all about the music' is mistaken and quite possibly self-defeating.

People do not just want the music - or if they do, it is not something they value particularly highly these days.

It is context, packaging, merchandising and the ability music gives for consumers to express themselves which really generate value these days.

And that's as true of Art Vinyl as it is of turntable.fm.

What the entertainment retailing market really needs right now is a mass market product which can generate the same kind of engagement these more niche plays are clearly delivering.

Why Apple will fall

Among the acres of newsprint about the woes of News International at the weekend,  there was one great piece it was easy to miss: the Mail on Sunday's account of the precipitous decline of Nokia, so dramatic it's almost a Murdoch.

A few snippets:

• In 2000 the Nokia share price stood at €65. Now it's €4.30;
• In 2002 Nokia was named the UK's number two "superbrand". By 2010 it was 89^th;
• Nokia's market share - once approaching 40% - is now below 30%, its lowest since 1999.

In short, Nokia is on the ropes.

And its relentless decline is of course the mirror image of the apparently ceaseless rise of Apple.

Just as Nokia has faltered, so Apple, powered by the iPod, iTunes, the iPhone and now iPad has gone from strength to strength.

In the FT Global 500 of the world's biggest companies by market capitalisation Apple appears at number three in this year's ranking, up from five last year. Nokia isn't even in the Top 100.

Apple's market value at the end of March 2001 was $321bn. To put that in context, Warner Music which has a worldwide marketshare in recorded music of around 12% sold for $3.3bn, meaning the world's entire recorded music industry may be worth less than a tenth of Apple.

Just as the value of record companies is at or near its historic low, so Apple's is puffed up to the max. Which is precisely why right now is a good time to consider what will happen when Apple suffers the same fate as Nokia and falls off its perch.

For the one thing we know for sure is that market dominance of the kind Apple's iTunes currently enjoys never lasts forever. The fact is, the iTunes share of more than 80% of single track sales in the UK and perhaps two-thirds of the digital album market is not sustainable in the long term. History shows, if competitors don't get you then the regulators will.

Remember when Microsoft was the biggest company in the world? It's now down to number 10. Google, the supposedly impregnable King of Search, now finds itself subject to anti-trust scrutiny.

There seem no good grounds at this point for iTunes itself to be subject to its own anti-trust investigation. A dominant market share is not in itself justification for a competition enquiry. iTunes continues to deliver a superlative consumer experience. Setting aside the inevitable day-to-day niggles, most labels I speak to seem generally positive about iTunes as a trading partner. 

As to where the likely competition to Apple - the inevitably iTunes-killer - will come from, that is no clearer either, although the rise of the internet-connected TV may be a good place to start.

Whatever, the end of Apple's dominance will surely come.

Which means for that small but dedicated band of visceral Apple-haters, your pain will come to an end.

To those at Apple the only thing that can be said is, Enjoy it while you can. It will not last forever.

Ask Nokia.

Mirror, Mirror on the wall…

So it's 2001, CD sales are at their peak, the internet's certainly out there, but broadband's not even on the agenda for most people. Exclusive content commands a premium price. And because Twitter and Facebook and MP3 blogs haven't been invented yet, it's possible to be a business magazine publisher and a "gatekeeper" to content about the music industry.

That was the Music Week I left 10 years ago.

So I took a particular interest in the news yesterday, that the UK music industry's trade paper has been sold to independent publisher Intent Media, familiar to many ERA members through its ownership of games industry trade paper MCV.

As is the nature of things, 10 years ago we never realised quite how good things really were. But the numbers tell their own story.

It's less than five years since the magazine's owner reputedly turned down an offer of £10m for Music Week alone. Now the magazine has gone to a new owner with three other titles and their spin-offs for less than a quarter of that, just £2.4m.

The declared turnover of the four titles sold yesterday is £5.4m. Ten years ago, the turnover of the Music Week Group alone - then comprising Music Week and the now-defunct MBI, fono anddotmusic.com - was £6.5m.

Subscriber numbers to Music Week are now barely a third of what they were at the magazine's height.

Which all means that over the past decade, Music Week's decline has not just mirrored that of the music business, it has exceeded it.

***

Many will simply shrug their shoulders at these developments. It's inevitable isn't it?

Everyone knows the music business has shrunk.  Many businesses have done far worse. Think of Musiczone, Woolworths, Zavvi and the hundreds of independent stores which have closed for good.

Even those print publications not exposed to a declining market like music are shrinking in on themselves. On the same day the Music Weeksale was announced business publisher Centaur said it was closing the print editions of its business magazines New Media Age and Design Week. Only last week The Guardian announced it will be transitioning to a digital-first product.

In magazine and newspaper publishing, just as in music, digital continues to drive out physical. The culture of free has slashed the price content can command. And because creating, shipping and selling physical product is inherently more expensive, it is bound to suffer. 

Much is gained in the transition to digital - immediacy (the idea of sending print magazines via post these days just seems quaint), convenience, targeted content.

But just as with music itself, we should not pretend that the erosion of the physical product does not also come with disadvantages, and those disadvantages are more subtle than you'd think.

In the case of a trade paper, its most important function may be actually independent of the content, the news and data it contains.

It is to hold up a mirror to the industry it represents. It's a magnifying mirror which makes that business look bigger. Take it away and the business is diminished.

It's directly comparable to music itself retaining a store presence on the High Street. Take it away and music is diminished. The very existence of a thriving physical business is a tangible sign of status and vitality.

Lose that function and something is lost.

That's why we should wish the Music Week team and their new owners all the very best. In a very real sense we need them and the mirror they put up to our business.

Because if you have no mirror, how do you know what you really look like?

Why artists need labels like Ministry of Sound

6Music have spotted it, Music Week stuck it on the front page and yesterday Popjustice waded in: pop's commentariat are going crazy about On Air On Sale and whether some labels are effectively cheating by breaking ranks.

The immediate reason for this week's flurry of coverage is a singles chart in which four of the Top Five did not obey the new industry accord that singles should be made available to download as soon as they go to radio - in other words they were serviced to radio ahead of release in order to build demand.

But should we really be berating labels for scoring Top Five hits? Should we really be beating up Ministry of Sound for propelling Example to Number One with sales of over 115k in a week?

Sounds curious to me.

***

The rationale for the On Air On Sale -expertly orchestrated for months by the MMF's Jon Webster and Joe Taylor - was essentially political. How can we lobby the Government for action against filesharing, went the argument, when for weeks at a time we don't give music fans a legal means to buy the music we're promoting?

As a political point, it seems pretty compelling, and so it was no surprise that on February 1, smack-bang-in-the-middle of attempts to speed up the introduction of the Digital Economy Act and the lobbying around the Hargreaves Review that the new policy was formally adopted by at least two of the four major record companies.

Despite the fact that by definition it seemed to concede the right to determine release dates to people who preferred to take music for free, it looked at the time like good pragmatic politicking.

***

Fast forward four months, however, and going by some of the reaction this week to the inevitable cracks that have appeared in the new policy and you'd think On Air On Sale was a new religion rather than simple political nous.

We are told of "disturbing wobbles" at the labels (sounds entertaining). There are demands that the OCC bans any singles which are serviced to radio ahead of release (the competition authorities would have fun with that one). And most over-the-top of all, the normally sensible Jon Webster demands that people "put the interests of the industry before the interests of an individual act".

Let's be clear: any manager who allows a label to put the interests of the industry ahead of the interests of the act he or she manages probably has grounds for complaint. Funnily enough, in normal circumstances it's precisely the kind of complaint the MMF would take up.

Surely if I'm an artist, I don't want a committee member, a consensus-builder, a smooth politician. I want someone who will go into the trenches for me.

I want a label that will do whatever it takes to make me successful. 

I want a label like Ministry of Sound that will help deliver me a Number One record.

***

The point about On Air On Sale is that get it wrong and the people who pay the price are the decision makers themselves. Thus if I go to radio too early and lose a bunch of sales to illegal downloading that's my lookout. If on the other hand I go early when everyone else goes late and I steal a march on them, then I'm the smart one.

It's no one else's business what I do. And you know why? Because it's my artist and it's my business.

The On Air On Sale campaign has had a positive impact by questioning a default marketing approach based on interminable set-up campaigns which had long gone stale. But replacing one orthodoxy with another is not the answer.

On Air On Sale may well suit huge international artists with an active fan base. It may well not suit a baby act who no-one's heard of.

Ultimately the only people with the right to decide what is right are the artists investing their talent and the companies investing their cash.

All the rest is noise.