In 1987, Sony took a stab at developing a magnetic tape digital equivalent of the CD when it used the helical-scan recording technology used in video recorders, to develop the Digital Audio Tape (DAT) system. Although DAT had a lot going for it, the sheer momentum enjoyed by the CD system was too much to overcome and DAT was eventually relegated to being a big fish in a small pond when it became the preferred medium of professional recording studio market where at its peak, it enjoyed an envious 80% of this sector.
Four more music delivery systems were introduced in subsequent years. Sony introduced the Mini Disc (MD), Philips and Sony developed the Super Audio CD (SACD), Philips unveiled the Digital Compact Cassette (DCC) and the DVD Forum introduced the DVD-Audio format. Although all these formats offered superior characteristics in terms of performance and convenience vis-à-vis the CD, they had to confront a consumer sector that, over the previous decades, became weary of getting burnt with new formats that promised a lot in the beginning, but eventually became obsolete leaving them with defunct hardware and software that were only good as expensive door stops or paperweights. These included the DAT, the Betamax system and the eight-track. The lack of appetite to try out something new proved to be the death knell of these formats. The DVD-A and SACD formats were further burdened by the paranoid developers who overreached in their attempts to prevent privacy and only ended up making consumers jump through way too many hoops to enjoy these formats.
The CD stayed dominant for most of the 1980s and the early 1990s at which time MP3 music files began gaining prominence and popularity. MP3 files may not have the fidelity of the CD system but they had some huge advantages in other respects. MP3 files are a lot more portable, easy to transfer and with the nosedive in the price of memory, they allowed you to not just store huge collections of music on a tiny device but you could take this device and therefore your whole music collection with you anywhere you go. The introduction and subsequent gigantic popularity of the Apple iPod and the iTunes downloading service only served to underline the advantages that MP3s enjoys over CDs.
The growth of MP3s at the cost of CDs was so exponential, by 2005, there were over forty million MP3 players being used and by 2009, by some estimates, more than a billion dollars had been spent on purchasing and downloading music tracks to MP3 players. This is not counting downloads to cell phones which accounted for another half a billion dollars. The downfall of CD as a medium was so fast and furious, it is ironic that today, the only sector where CD players are still selling with any conviction is in the high-end audiophile sphere where the models that sell for well over a thousand dollars are the ones that are more in demand.
And speaking of the audiophile sphere, even here, CDs are slowly but surely losing ground to the companies that offer high resolution downloads. Not only is it easier to obtain your music by downloading it from these sites, you also have a choice of getting your favourite music in higher resolution than the 16/44.1 Redbook resolution that CDs are restricted to.
Although MP3 has been dominant over the past decade, it is now facing some stiff headwinds which it is finding difficult to cope with. The sales of MP3 music file downloads have been collapsing faster than a badly prepared soufflé. The principal protagonist for MP3 troubles are online radio/music services like Rdio and Spotify, which are emerging as the next kings of music delivery. Their growth has been so prodigious, it is estimated that their current audience is around 200 million people with an astounding growth rate of around 10 to 20 million every year.
What is causing this seismic shift in the way music is delivered is the fact that ad revenues are shifting quite dramatically from broadcast radio to streaming services which are slowing starving the former and helping the latter become bigger and more muscular. In 2007, the proportion of total music industry revenues from streaming was just 3%. In 2013, that had grown to 21%. Around 45% of radio listeners today claim that their on-line listening is at the expense of their AM/FM listening. An astounding 75% of people in the 12 to 25 age group listen to on-line radio on a monthly basis and close to two-thirds of them listen on a weekly basis. Over the next four to five years, the streaming services are expected to grow by around 40% while broadcast radio is expected to decline by almost 45%. As a legacy medium, broadcast radio currently enjoys a very lucrative 16 billion dollars in annual advertising revenue but that is expected to diminish quite exponentially over the coming years.
The recording industry is keenly watching the unfolding of a new era of music delivery as it is likely to afford them lucrative new opportunities for growth. The lifeblood of broadcast radio are the hit songs that they play on air, yet the artists and labels behind these hit songs get just a fraction of the 16 billion dollars of broadcast radio revenue. In the old model artists and labels gave broadcast radio a virtually free ride because air play of their music helped them sell more vinyl records, CDs, pre-recorded cassettes and MP3 music file downloads. But that is fast going the way of the dodo because an ever-increasing number of consumers are no longer relying on physical media and downloads for their music supply.
This change of guard means that recording companies and artists now have the opportunity to formulate and establish a business model where they get a much bigger share of the advertising revenue that is obtained as a by-product of delivering music to the masses. They can do this by embracing streaming services while at the same time developing and growing their own audience via their own branded offerings. This will put them in a position to exert far more control over large audiences and big amounts of data, which are two of the critical assets, that advertisers lust after.
Streaming service subscribers might be surprised to learn that less than 18% of revenues of companies like Pandora, come from subscription fees. The lion’s share of their revenues comes from advertising. What this means is that going forward, the revenue for recorded music is going to be derived from the act of selling music audiences to advertisers rather than selling music to consumers. This is a sea change to the past business model. Those that adapt to this new highly disruptive paradigm will not just survive but they will actually thrive. On the other hand, those that are not cognisant of the paradigm shift taking place and who cling to the old model like criminally convicted CEOs trying to clinging on to their dignity after being thrown in the slammer, are destined to go the way of the dinosaurs.
For consumers, it is going to be hard to resist embracing the instant gratification of enjoying the lip smacking delicacy of instantly accessing over 20 million songs on demand with the icing on the cake provided by the ability to customize and personalize what you get based on personal music preferences. Contrast this to having to reconcile what the radio DJs choose to play for you and no option to choose the songs or genre of songs that tickle your fancy and it is easy to conclude that this is a veritable no brainer.