Much of the contemporary debate about digital music’s financials centres around perceived inequities in artist pay outs, particularly from streaming services. These are very valid concerns and I continue to argue for an honest and transparent debate. However there are two equally worrying issues: the sustainability of the stores and services themselves and the class divide that has grown between the US and European digital music markets.
The Trans-Atlantic Digital Divide
It has been clear for a number of years now that the US digital market has been massively outperforming its European peers. A number of factors contribute to this, including:
- The stronger footprint of Apple in the US
- That the US is a more unified and more easily addressable consumer market
- The fragmented rights landscape in Europe
- European online consumer behaviour lags that of the US
Those factors alone would be enough to stifle European prospects, but paradoxically Europe has developed a much larger number of digital services than the US, both in relative and absolute terms. According to the IFPI et al’s Pro-Music website, pre-accession Western Europe has 465 services compared to just 24 for the entire US. In relative terms that translates to 1 service for every 600 thousand European Internet Users compared to 1 for every 10 million US Internet Users.
Music’s Digital Double Whammy
So in effect we have a ‘digital double whammy’: Europe has too many services chasing too few customers. When we look at the per-service revenue picture the picture becomes even more concerning (see figure). In the chart we are looking at the Average Margin Per Service (AMPS). This assumes an operating margin of approximately 20% per service following deductions for recording rights, publishing rights and payments. 20% may sound like a healthy margin but bear in mind that this pot has to pay for a wide range of costs, including Marketing, Technology, Fulfilment, Customer Care, Staff etc. (In fact scale is crucial and even Apple can only make downloads an ‘on average break even’ business.) Of course the exact margins vary according to the precise business model, label terms etc but the 20% assumption gives us a good working measure to gauge regional trends.
The first thing that jumps out is the massive disparity in US AMPS ($26.03m) compared to Europe ($0.61m). In effect the over-supply of European services acts as an accelerator on the disparity between the regions. At a country level there is further diversity, with the UK and France standing out as the strongest – or rather least weak – margin markets.
Scrapping over Apple’s left-overs
But of course the digital music market is not an equally distributed one. Apple’s iTunes store accounts for the vast majority of the download market, hence the second metric in the chart: AMPS post-Apple. This shows the average margin per service based upon what is left of the market after Apple’s share has been removed. (To do this a 70% share assumption was applied to the paid download segment of each digital market. In some markets this will underrepresent, in others over-represent, but it nonetheless gives us a good comparative directional guide). Looking at AMPS post-Apple the situation is starker, with the average margin per service in Italy dropping to less than a quarter of a million dollars.
Too many services are chasing too few customers
Back in 2006 at JupiterResearch I wrote a report that made a case for the lack of sustainability in the digital music value chain in Europe and the risk it posed for services. 5 1/2 years on and the situation is unfortunately beginning to come to fruition. The reason we haven’t had a market implosion yet is because so many of the owners of these services – such as ISPs and mobile operators – continue to show appetite to run them at a loss because of perceived benefits to their core businesses. But the simple fact is that there are too many services. In the pre-digital age most markets had but a small handful of national music retailers. So why in the digital age should that become dozens, particularly when the recorded music market is half its peak size? (The UK alone has 74 services).
When choice doesn’t = choice at all
And it is not as if these 465 services are bringing extensive choice to European consumers. The majority of them offer the same catalogue, at the same price with the same device support. All that this over supply of me-too services does is muddy the water. There is so much choice that there is no choice at all. If digital music is ever going to get out of its current impasse, the music industry must fix the over-supply issue. Until it does so, any progress in discussions on artist pay-outs is going to be constrained by the growing concerns posed by an underperforming digital market.
Music Industry Blog 
These are wise words. The weak margins of existing streaming music services in Europe can partly be ascribed to over-supply relative to demand and fragmentation of the market – both of which Mark Mulligan points out – but there’s also a lack of service innovation in Europe – the continent that drove mass adoption of mobile phones. For mobile phones it was Pay As You Go that transformed them from corporate tool to an everyman must-have. Today’s streaming music services are caught between ad-supported models, that can’t give a decent return to either the operator or the artist, and subscription models that Digital Natives (the category of younger, ephemeral music consumers identified by Mulligan at this year’s MIDEM) can’t or wan’t pay for. At Psonar we see our model – Pay Per Play – as a real revolution that can change the economics of streaming music for the better – to the benefit of consumers and musicians alike.
The recorded music market is half its peak size by revenue, but not by unit sales, suppliers (artists) or performances (broadcasts, streams). This lower revenue is shared among more buyers (transactions), artists and “airplay”. At the same time, all the previous players are still in the market and most of their roster cuts have gone on to DIY or smaller labels. The previous distributors, retailers and broadcasters were completely unable to offer the services these and newer players demand online. That is why there was an increase in services. Even after consolidation, which is inevitable, there will be a demand for a much wider range of services to support the amateur, semi-pro and below-the-radar pro market.
And into this fray comes yet another service chasing unit sales, Google Music. One has to wonder what is behind the thinking on that one. In the US, it might be simply that there is room for someone alongside Apple and Amazon. But in Europe? Presumably, this is why it’s not available here yet. I can’t help thinking it would have been smarter to invest in the streaming business.
With the majority of the European stores quantity does not translate into increased opportunity for smaller artists, in fact I would argue the opposite. The likes of Bleep, Beatport and eMusic are in the minority, The lions’ share of the services as mass market value propositions that are focused on retailing the short head of the tail.
But I do agree entirely with the market need for the increasingly important semi-pro and small indie segments of artists. There are a host of services beginning to meet their needs and there is a good case for a greater quantity of those segmented by factors such as genre, discovered / undiscovered, signed / unsigned etc
What about the BUMA/STEMRA partnership with IMPALA? Can a unified collecting system help the EU’s digital music market?
(See http://www.thecmuwebsite.com/article/dutch-collecting-society-announces-europe-wide-shop-for-indie-labels-securing-mechanical-rights/ )
By the way, the comparison with the Eurozone crisis is completely irrelevant. If a download shop goes bust in Europe, it will not be missed. The costs will be written off, and many of those in operation are not profit centres anyway. This wouldn’t stop the other shops from functioning, nor affect their profits (quite the contrary).
We could open a painful debate about which ones could usefully get out of the way, in fact.