By Kash Reid-Bashir
Digital Music: Evolution or Revolution
Is Apple here to save the day?
Given the recent release of Apple Music, I felt compelled to pen a piece reviewing the dynamics of the music industry as it transitions into a new form.
Much as I miss them, gone are the days when one would visit a music store to pick up a pre-release record to play at a club or call up friends to get a view on an unsigned band who are playing at a local venue. Today, all one needs to do is reach for any electronic device and visit one of a number of online platforms which readily provide a streaming or download capability. Many of these services have a catalogue which extends to over 30m tracks which are available to stream or download. All this was almost unimaginable even a decade ago.
In terms of annual global music revenues, we finally seem to have reached a floor at around $15bn[i]. Digital and physical revenues are split broadly evenly. In my view, growth in streaming revenues is significant and likely to displace a high proportion of physical and download sales over the following few years. In broad terms, we have reached an inflection point where music revenues are either likely to remain stable or rise over the coming years.
As for revenues flowing to artists, we have also reached a point where the main digital platforms charge has stabilised at a consensus value of around 30% of revenues with other intermediaries (music labels) charging around 50% of revenues for all the services provided. This leaves around 20% of the headline after tax price of music flowing to artists. As for streaming revenues, over the long term, regardless of the mechanism used to consume music we can rest assured that artists will receive a relatively similar share of the revenues generated by the music industry (assuming global household take up of around 10-20% for streaming services which does not seem unreasonable[ii]).
Apple Music: Future orientation
To go full circle, Apple Music feels more evolutionary than revolutionary. All the core elements of other prominent music services are covered but once again hidden underneath the many aspects of the new, rather clumsy application interface are a number of critical innovations. These incremental innovations are likely to be the springboard for new iterations of the application eventually resulting in a completely new way to engage with your audio entertainment. Music curation, video inclusion and the artists portal combined with the apple eco system have the potential to make this offering a must have for a significant number of users.
Further Differentiation: Artists Portal
Potential areas for Apple to further differentiate the offering could well include a more rounded area where individual artists can truly engage with potential and actual fans. It is not unimaginable for there to be the inclusion of a wider array of content. Examples could include: exclusive interviews, pre-release material, comment and feedback boards, video based social chat rooms and video content from recent performances. Over the long term, virtual reality could be integrated in order for individuals to experience available content in new forms.
Enhanced Video Content Portfolio
A wider base of video content seems to be an inevitable product extension and given the inherent revenue potential based on an eventual tiered subscription model and / or visual advertising this is an area Apple are unlikely to pass up. Interestingly, a number of competing providers including Spotify and Facebook have also announced their strategic intent to enter this audio visual niche. Notably, Steve Jobs mentions that he has finally ‘cracked it’ when referring to an Apple TV offering in the Walter Isaacson biography. There is a strong chance that video content on the Apple Music platform could form part of that solution.
Finally, the fact that Apple has a significant user base with a high propensity to spend should result in a smooth transition from paid downloads to streaming content for a not insignificant element of the music industry given the revenues currently generated over the Apple platform. An additional attraction for users will be the fact that this can be facilitated within the very familiar Apple eco system. So once again, it seems that Apple is here to save the day.
Please note that this opinion piece is not sponsored by any organisation affiliated to the media or technology industry.
[i] Revenues provided by The International Federation of the Phonographic Industry (IFPI)
[ii] Revenue calculation methodology available from Converge Advisors and Associates upon request
Kash Reid-Bashir, Founder Director, Converge Advisors and Associates
Converge Advisors and Associates was founded by Kash Reid-Bashir an independent, corporate financier with extensive strategy and finance experience within the media, technology and telecoms sectors. Kash has previously been part of Booz Allen Hamilton, Thomson Reuters and FTSE (a Pearson / London Stock Exchange joint venture). Kash graduated with an MBA from Cranfield School of Management.