The State of Digital Music in 2006

Digital Music Demand is Greater than Ever

With the start of 2006, digital music has started its growth from infancy into adolescence. In the week between Christmas 2005 and New Year?s, 20 million tracks were downloaded in America, and another million in Britain. Those are some seriously healthy numbers. Not only do they reflect the huge amount of iPods and other portable devices sold, but also the spread of broadband connections, and the fact that people are now comfortable consuming their music digitally, on a track-by-track rather than album-by-album basis. Long predicted, the listening habits of the general population are beginning to shift.

It?s seismic, but it?s still small?digital music accounted for only six percent of total music sales in 2005. Yet even that is a massive increase over the year before, a whopping 194 percent, which is fiscally valuable as the sales of CDs continue to decrease (although even with digital sales, the record labels experienced another downturn in 2005). While the young, usually the first to adopt and adapt to new technology, have been downloading and swapping music for quite some time, there?s been a ripple effect into the older, warier area of the population, one that will only increase. Thank?or blame?Apple and its iPod, or any of the many other makes selling like hotcakes in the stores.

As a real indicator that digital demand has moved beyond the young, music giant Universal recently announced plans to digitize 100,000 tracks from its vaults over the next four years. That?s a big move, but it?s more important for its implications. They?re not talking about music for teenagers, so they obviously believe there?s a burgeoning market among baby boomers, now quite happy and very willing to part with money to download obscure songs from their youth.

 Apple iTunes

But if digital music is now a teenager, it?s one with a number of issues, and one of the biggest and trickiest is digital rights management (DRM). In essence, it?s a limit on what you can do with the tracks you buy and download. In some cases, you can share the track between a limited number of computers and portable devices. In other cases, as with material purchased from Apple?s iTunes store, if you want to send the tracks to a portable device, it has to be an iPod (which will only play unprotected mp3s and material from iTunes). Given that iTunes is now one of the largest music retailers in the world, this could cause potential long-term problems. After all, having paid for the track, shouldn?t you be allowed to do what you want with it?

With digital music and the portable player becoming ever more widespread, this is a question that?s only going to become more vexing. The early adopters were willing to accept the limitations, but things are going to have to change as everything rapidly reaches critical mass. The whole concept of DRM is going to have to be rethought. That?s going to cause a lot of tension with record labels, who guard their product very closely. Some encode their own players on a disc to prevent copying.

Indeed, the idea of DRM has already caused one major furor, when it was discovered that Sony BMG went far beyond a player and used a virus-like system, XCP, to stop piracy and copying of some of its CDs, while other CDs were protected by a system called MediaMax. The XCP system was hidden deep in the Windows operating system, and the row and consumer lawsuits followed its discovery. Those were resolved in December 2005, when a judge approved a deal involving Sony BMG giving cash refunds and free downloads to consumers who bought CDs with the XCP technology (those with MediaMax only received free downloads).

Privacy and Security

That leads easily into privacy issues, which have also been tripping up iTunes lately. A new version of the software features a Mini Store, which searches for similar tracks and brings up recommendations when a person clicks on a track in iTunes. According to some bloggers who investigated, data is being sent back to Apple containing not only details of the music, but also the unique identifiers for the computer and the iTunes account (in fairness, the license for iTunes does state that it contacts the Gracenote music database to discover which album is being played via the program, and Apple says it doesn?t save any information collected, and that when the Mini Store is hidden, no data is passed).

KazaaOne thing the coming year might decide is the future of the peer-to-peer (P2P) file sharing services, such as Kazaa, where people share music and video files for free. Organizations like the RIAA have been bringing lawsuits against individuals and demanding compensation from heavy P2P users, and trying other tactics such as posting empty or misleading files in an attempt to discourage people. To an extent, it?s been working, although not as well as they?d hoped; a survey shows that 51 percent of those who download music have done so illegally at some point. But like prostitution, it?s unlikely to ever vanish completely?whatever happens, there will always be a hard core who want music for free, and who seek the obscure that they can?t find elsewhere. However, as more tracks, both the most recent and the older, are digitally easily available via pay services, fewer people will use P2P. For the most part, P2P interfaces are awkward. You never know what?s going to be available for download, or whether you?ll be able to grab it before it vanishes offline. And, for many, it raises the query of virus transmission. What the industry needs to address isn?t so much going after illegal downloaders but rather why they?re doing it in the first place, and to change that. People are willing to pay for music. That much has been amply demonstrated in the last year. If they can do it in a secure environment and at a reasonable price, they?re happy.

Digital Music Pricing

Yet this, too, raises another question?equitable pricing. Depending on where in the world you are, the cost of downloading the same track can vary. Understandably, that makes a lot of people?certainly the ones paying higher prices?angry. England pays more than the rest of Europe for a track on iTunes, for example, and it?s a price significantly higher than that for U.S. consumers. While it?s supposedly because of rights issues in different countries, the fact is that that cyberspace is meant to be a global economy. And as digital music continues to expand, that?s an issue that going to have to be faced.

So, too, is the idea of subscription versus purchase models. For now, subscription seems to work well enough. But the question is, how much of a future does it have? Basically you?re renting the music, and as long as you keep up the payments, you can play it. But once you stop, it?s all gone. How long that can really satisfy people remains to be seen. Those who follow the charts might be happy as the music is ephemeral, but most people prefer to own the music they pay for, and that could well cause a shift in thinking for many of the services, placing less emphasis on subscriptions and more on ownership.

 Target

And this, too, feeds back into pricing. In the near future, the biggest factors to draw customers will be the depth of a library and the price per track. A high profile helps (as iTunes shows), but as the market changes, it might become less of a factor as competitors become more aggressive to claim their share of a growing pie, and many services get essentially equal libraries. After all, it?s in the interests of record labels to have their product as widely available as possible?you couldn?t imagine Sony selling only to Borders and ignoring every other chain, for example (at the same time, it?s not uncommon to see services offering limited-time exclusives on tracks to lure in customers). As people become savvier about the different services, they?ll shop around for tracks, taking some here, some there, much as they might flit between Target and Wal-Mart, for example.

Although popular music remains the biggest and most lucrative market, the smaller niches have shown a rise in digital sales. It gives curious consumers a chance to taste without a significant investment. And even in areas that require more commitment from the listener, such as classical music, the increase in digital demand has been staggering?up almost a hundred percent in the U.S. during 2005 (and this, interestingly, among a group generally seen as audiophiles, whom you wouldn?t imagine going for the relatively low-fi mp3s). It?s not yet a panacea for declining CD sales, but it?s a big help in plugging the gap.

The big players in the game are already established, on both first and second tiers. A couple more might join the fray, but the lines have essentially already been drawn, with everyone gunning for iTunes to take chunks out of its share. That could well happen; the ongoing supremacy of Steve Jobs?s baby is far from guaranteed. Once someone else figures out a model that works better for the consumer, actually listening to and providing what customers really want, all bets will be off. And, sure as eggs is eggs, it?ll happen.

Although digital music is essentially home-based?you download onto your computer?some people are betting it can become a public commodity. The number of digital music kiosks in stores is growing, where you can download tracks onto a CD or your mp3 player. A number of chains have experimented with them, such as McDonald?s and Starbucks, which currently offers a million song catalog and a seven-track CD burned for $8.99, with each additional track 99 cents. There are plans to put them in other coffee shops, airports, and convenience stores?basically anywhere people gather. But there?s one big problem:  The tracks sold by the kiosks are protected by Microsoft Windows technology, which means they won?t play on an iPod. In other words, it comes back to DRM, one of the main labyrinths that will need to be explored this year.

What we?re really seeing is a market that?s growing almost too rapidly. The baby steps have become longer strides, but right now it remains rather confused about its future. The only thing that?s certain is that there?ll have to be a lot of change if the growth is to continue. Digital music is undergoing its teenage angst. As any parent can tell you, those are difficult times, when the youth are finding themselves through a series of identity crises. It?ll come out the other side, more mature, stronger, and ready to face the future. But 2006 is going to be a critical year in its development.