The Death of the Long Tail

Today MIDiA Consulting is proud to announce the publication of an important new report: The Death of the Long Tail: The Superstar Music Economy.  The report is available free of charge to Music Industry Blog subscribers.  (If you are not yet a subscriber to this blog simply enter your email address in the box on the right hand column of the home page.)

The 21^st century decline in recorded music revenues continues to send shockwaves throughout the music industry and although there are encouraging signs of digital-driven growth, the impact on artists is less straightforward.  Total global artist income from recorded music in 2013 was $2.8 billion, down from $3.8 billion in 2000 but up slightly on 2012.  Meanwhile artists’ share of total income grew from 14% in 2000 to 17% in 2013.  But the story is far from uniform across the artist community.

The Superstar Artist Economy

The music industry is a Superstar economy, that is to say a very small share of the total artists and works account for a disproportionately large share of all revenues.  This is not a Pareto’s Law type 80/20 distribution but something much more dramatic: the top 1% account for 77% of all artist recorded music income (see figure).

The concept of the long tail seemed like a useful way of understanding how consumers interact with content in digital contexts, and for a while looked like the roadmap for an exciting era of digital content.  Intuitively the democratization of access to music – both on the supply and demand sides – coupled with vastness of digital music catalogues should have translated into a dilution of the Superstar economy effect.  Instead the marketplace has shown us that humans are just as much wandering sheep in need of herding online as they are offline.

In fact digital music services have actually intensified the Superstar concentration, not lessened it (see figure).  The top 1% account for 75% of CD revenues but 79% of subscription revenue.  This counter intuitive trend is driven by two key factors: a) smaller amount of ‘front end’ display for digital services – especially on mobile devices – and b) by consumers being overwhelmed by a Tyranny of Choice in which excessive choice actual hinders discovery.

Ultimately it is the relatively niche group of engaged music aficionados that have most interest in discovering as diverse a range of music as possible.  Most mainstream consumers want leading by the hand to the very top slither of music catalogue.  This is why radio has held its own for so long and why curated and programmed music services are so important for engaging the masses with digital.

Music has always been a Superstar economy and there will always be winners and losers in music sales, with the big winners winning really big.  Over time the improved discovery and programming in digital music services should push the needle for the remainder artist tier but a) it will not happen over night and b) it will still have a finite amount of impact.

The Catalogue Size Arms Race

Matters are worsened by the music services’ catalogue arms race which has become entirely detrimental to consumers’ digital music experiences.  Action needs taking urgently to make sense of 25 million songs, not just through discovery and editorial, but also by taking the brave decision to keep certain types of content, such as sound-alikes, outside of music services’ main functionality.

Until labels, distributors and artists come to together to fix the issue of digital catalogue pollution – sound alikes and karaoke especially – the Tyranny of Choice will reign supreme, hiding 99% of artists under a pervasive shroud of obscurity and giving the Superstars another free lap of the track.

Is the UK Music Industry Sleepwalking into a CD Crisis?

An upfront note: though this post focuses on the UK market, the principles, as you will see, apply across most music markets.

At first glance the UK recorded music market isn’t in too bad shape: album sales declined by a not too worrying 5.6% in 2011 and digital grew solidly, including 26.6% growth in digital albums*.  And of course there was Adele.  So an end of term report card would probably read something like ‘Could do better but good signs of improvement’.  Unfortunately that is a case of papering over the cracks.  Here’s why:

• CD sales are falling at an alarming rate: though digital album unit sales grew by 5.6 million, CD album sales fell by 12.3 million.  So the digital growth was less than half of the physical decline in absolute terms.  A worrying ratio at this stage in the development of the digital market (i.e. when it should be maturing, not just getting started).
• The single continues to drag revenue growth down. Digital singles boomed to 176.6 million, a whopping 56% greater volume than combined physical and digital albums. And yet their value is close to just a fifth of album revenues.   Despite solid digital album growth, unit sales of digital singles increased by about 17 million, three times the units growth rate of digital albums.  And though the spend increment is much greater for albums – and this is of course the lens labels will typically view the trend – the unit growth is the best indication of consumer behaviour.  i.e.  music buyers are still throwing their weight behind digital single purchases at a quicker rate than they are digital albums.
• The CD buyer is withering on the vine.  Most importantly of all, the CD buyer is becoming an increasingly rare breed.  There are fewer shops on the high street, which is where the majority of CD buyers still buy their albums. HMV – the UK’s leading music retailer by some distance – has been suffering well documented struggles.  It is possible that HMV will disappear from the high street entirely in the next couple of years.  Though this won’t be an extinction event for CD buyers, it will however leave a gaping hole in music revenues (possibly a quarter of all album sales).  The majority of these Digital Refusniks who haven’t seen any reason to start buying CDs online – let alone downloads – are unlikely to suddenly switch even if they have to.  More likely they will just drift out of the market entirely.  These are the passive music fans who only buy the occasional album, don’t have an iPod, don’t want to spend £9.99 a month on music and who listen to a lot of radio.  With so much more choice of high-ish quality music on digital radio and TV these consumers won’t even feel that much of a dent in their music behaviour when they no longer buy CDs.
• The CD is disappearing from the living room.  I’ve been beating this drum for years now but still don’t get the sense the risk is being taking seriously.  Living room tech spend has shifted firmly to the TV and music’s weakening foothold is either a docking station for the digital crowd, a streaming player for the really tech savvy or, in the vast majority of cases, a dusty old midi player which sooner or later is going to find itself in the bin or the garage.  When that happens music will have disappeared out of the living room (and before anyone makes the case for music on the TV, that permanently relegates music not so much to poor relation status, as crazy aunt locked away in the attic.  People buy TVs to watch stuff on them, not to have a blank screen while music plays on the poor quality speakers).

The Bottom Line

The music industry is being entrapped by a demographic pincer movement: on the left the emerging Digital Natives lack a product strategy that meets their needs, on the right the traditional CD buyers lack a format succession cycle.  This is why the industry is becoming obsessed with squeezing as much ‘ARPU’ as it can out of the remaining core of 20 somethings and 30 somethings.  But of course that strategy can only go so far.  I’ve written at length about strategies for the Digital Natives, but the case for the Digital Refusniks is even more pressing, if less glamorous.  The following needs to happen, and quickly:

• Digitize the relationship.  Before an analogue customer base can be migrated to digital, the relationship with those customers must be digitized.  In fact most HMV music customers have no relationship with HMV at all, or rather it is a series of brief encounters that start and finish with a cash till transaction.  First HMV – and indeed high street music retailers anywhere – need to start finding a way to establish digital relationships with these customers and then use that as the platform for a digital revenue strategy.  As my astute former colleague James McQuivey is fond of pointing out, Netflix built is success on the platform of digitizing its customer relationships. It is time for high street music retail strategy to follow suit.  (And by the way, simply trying to push consumers to the online stores isn’t the answer).
• A format succession strategy needs putting in place. The Digital Refusniks consumers need their hands holding as they are gently coaxed into the digital realm.   They need convincing that the ephemeral web has tangible benefits comparable to that of the CD. That might mean delivering things like better artwork etc. but to get this right we need to know a lot more about the emotional triggers that CDs press for this consumers.  A proper human needs assessment needs conducting, onto which a human-needs based product strategy can then be mapped.  In all likelihood this will result in a couple of hybrid physical-digital products which will deliver all the benefits of CDs with a steady – but not overwhelming – stream of digital content to allow digital to ‘show some leg’.
• A new beachhead in the living room.  As I proposed 4 years ago, the music industry (principally the label and retailer elements) need a new living room strategy which should take the form of a new piece of highly affordable Hi-Fi equipment.   While its encouraging to hear that Google looks set to build upon the fine work of Sonos with some streaming music kit, the Digital Refusniks specifically need a hybrid device i.e. one that plays CDs too.  Something that looks contemporary enough to warrant replacing the old midi system and is cheap enough to shift millions of units.  You’ve probably guessed by now that this will need to follow an Amazon Fire approach of loss leading on the hardware to establish the Trojan horse for content sales.  But it is an investment that will pay off.

The Digital Refusniks are a challenging and unfashionable demographic and the counter-case for addressing them is that in 10 years or so they’ll have disappeared from the market anyway.  My conservative estimates put the loss in the region of 15% to 20% less total UK recorded music revenue in 2016.  The industry may well be able survive its revenue forecasts being that much smaller, but a) does it want to? and b) HMV can’t.

*All sales numbers are BPI trade values.  You can see the complete BPI release here: 

The Tale of the CD, the Digital Refusnik and the Charitable Collector

Earlier this year I raised the question of whether the music industry was going the way of the newspaper industry, whether its core audience was aging, stuck on its physical format while the younger generation feasted on free content.  It is becoming increasingly clear to me that this dynamic is arguably the most sizeable challenge facing the recorded music industry.  Product innovation (my hobby horse) is of course crucial, but its remit will be drastically reduced unless the ‘CD Problem’ is fixed in tandem.  Indeed, the two are intertwined.

The CD is polarizing the music buying marketplace

The importance of the CD is at serious risk of becoming a hindrance to innovation, particularly as its core customer base becomes more entrenched:

• The CD as fossil fuel. I have often argued that the CD is the record labels’ heroin, a habit which they simply cannot kick and which is hindering their ability to move on in life.  The analogy is probably a little unfair, as it implies the relationship is a purely destructive one.  A fairer metaphor is the world’s dependency on fossil fuels: we all know that they should run out some time in the not so distant future.  But we also know that we have been hearing about their imminent depletion for decades and yet they are still here, thus far at least.
• Digital is creating a fault line across the music buyer landscape. With all of focus on digital strategy it is sometimes easy to forget that the CD is still the beating heart of music revenues and the most widespread music purchasing behavior, even in the US, that most digital of western music markets (see figure one).  What is of concern is that a very large proportion of those CD buyers only buy CDs and what is more, they buy them offline in high street shops, malls and supermarkets.  The industry used to view these consumers as the next wave of digital customers, the buyers who would naturally transition to digital.  Unfortunately it is becoming increasingly clear that many of these consumers are better viewed as ‘Digital Refusniks’, consumers who have either actively chosen not to go digital (e.g. vinyl junkies) or see no appeal (mass market middle America, Mr Main Street, Mondeo Man etc).  But these consumers are getting older (see figure one) and unless a transition strategy is implemented they will just carry on getting older until they are with us no longer, just as is happening with newspaper readers.
• CDs work fine while we all still have CD players.  The problem with CDs is that you need somewhere to play them.  That might not feel like a problem now but it is going to become one.  Technology expenditure in the living room has shifted from audio to video.  Our TVs have got bigger, as has the size of the piles of boxes underneath them (which for some reason are still called ‘set-top’ boxes even though most TVs don’t actually have ‘tops’ anymore).  Meanwhile the Hi-Fi has become the second class citizen of the living room. People used to change their Hi-Fi’s simply because manufacturers changed the colour they made them in, now the average living room either has a dusty old midi system or an iPod docking station.  For the Digital Refusniks – most of whom of course don’t have docking stations – there will come a time, not so far from now, when that dusty old Hi-Fi looks just too old and will be put away in storage.  At which point the CD will have disappeared out of the living room and there will be little reason for buying CDs anymore, which will actually mean just not buying music anymore for these consumers.  The TV, radio and the CD player in the car –as long as there still is one – will sate their music appetites instead.

A physical-to-digital transition strategy must start with a keener understanding of what makes CD buyers tick

The Digital Refusniks need bringing into the digital realm with hybrid physical-digital products before they simply fall out of the music buying population.  The case for a physical-to-digital transition product strategy is clear, but it needs basing upon a clear understanding of why people value CDs. Across the music industry, consumer research projects must create a detailed and nuanced picture of CD buyers’ wants and needs.

To this end, but in an entirely non-scientific, not statistically significant and largely subjective manner, I yesterday canvassed my Twitter followers with this question: Do you still buy CDs, and if so why?  The results, as long as they are considered in a purely directional and illustrative sense, present some interesting trends (see figure two):

• 77% of my tech-savvy music aficionado skewed base of Twitter followers still buy CDs
• A fifth of those CD buyers also buy vinyl
• Ownership, supporting favourite artists and artwork are the top three reasons for buying CDs
• Just over a fifth only buy CDs for ‘special’ albums and just under a fifth only buy CDs rarely
• 14% said they had either stopped buying CDs altogether or were buying fewer because of streaming music (in most cases they were paying for 9.99 subscriptions)
• 12% buy CDs because they are scared of their PC and / or cloud services crashing and losing all their music

Say hello to a new music buyer segment: the Charitable Collector

The broad picture is one of the CD as a hybrid of a collector’s item and an honesty box: people buying CDs to support their favourite artists and to own something tangiable and visual.  Perhaps the best label for describing this very specific group of conscientious CD Buyers is Charitable Collectors. Of course the music industry cannot afford for the CD to become relegated to a role as the picture disc of the 21^st century.  Also artists should be working out ways to deliver much greater value to their dedicated fans than just a plastic disc which they often don’t even see much income from.  But challenges aside, there is a rich seam of value for music product strategy to tap and to test.

It is important to consider that my Twitter followers skew towards tech-savvy music aficionados so this is more of an insight into the minds of digital music fans who also still value CDs rather than the Digital Refusniks.  Nonetheless there are some key learnings here which translate across both groups and which, if nothing else, provide some solid foundations for exploring just what the industry should be asking about to truly understand the diverse priorities of CD buyers.

Without fixing the CD problem revenues will decline in the long run

Finally, the revenue case for a physical-to-digital transition product strategy is simple: unless it happens music revenues will decline.  Figure three shows a scenario forecast for global music sales that assumes that things stay the same as they are now i.e. that digital growth remains around the 7 to 8 percent mark and that CD revenue decline slows, as sales consolidate around the hardcore of Digital Refusniks and Charitable Collectors.  In this scenario we will most likely see some modest growth by 2012 and 2013 but after that the market will enter steady decline despite continued digital growth.  The reason for this is twofold:

• Digital needs a new generation of music formats to drive stronger growth (see my D.I.S.C. post for more on this)
• CD revenues will start to decline at a steady CAGR of 5% or so due to natural wastage among the remaining CD buyers due to all the various reasons highlighted above

The CD remains one of the music industry’s most valuable assets, second only to those consumers who are still its loyal buyers.  Now those consumers need a new generation of music products that meet their needs in a way that downloads and streams clearly do not.