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Playing a New Tune:
The Music Industry’s D-I-Y Era
By Lauren Rich Fine, CFA and Galen Vaisman
Highlights
•Illegaldownloadscouldbecostingtheglobalmusicindustry$10billionayear,theveryamountbywhichtheglobalindustryhasdeclinedsince1999.•Entrepreneurialartistshavemoreopportunitiesthanevertomakeitwithoutthebackingofalabel.•Transactionactivityinthemusicindustryhasbeenrobustfrom2006-8withover150deals.•ThemusicindustryisstillsearchingforabusinessmodelastheInternethascanni
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balizedCDsales,yetthepaceofinnovationandsensetheindustryhascomeclosetobottomingmakesitseeminglysaferforinvestment.•MySpaceMusichasalotofcompetitionbasedonourreviewofthemajorventuresinthisarena.
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E   x  e  c  u  t  i   v  e  S  u  m  m  a  r   y  
 
 
Wehaveapproachedthisreportwiththreegoalsinmind.First,welookattheshiftofvalueintheindustryoverthelast10yearsasthemarkethasmigratedonline.Secondly,weexploresomeofthecurrentmajoronlinealliances/initiatives.Andthirdly,wereviewthedealmarketoverthelastthreeyears.Ultimately,itisanindustryundergoingmassivetransit ion.
 
Clickheretopurchasethefullreport.
 
Evaluating the Impact of the Internet:
Thereisnoquestionthatthemusicindustry,likemanyothers,hasbeendramaticallytransformedbytheadventoftheInternet.Themostobviousimpacthasbeentheprolif 
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erationofdigitaldownloadsandunfortunatelytherelatedproblemofpiracy,estimatedat95percentofalldownloads.Specialtymusicretailershaveiledforbankruptcy,andthevideomarkethasshiftedfromMTVtoYouTube.Lawsuitsareplentiful.TheInternethasalsoloweredthebarrierstoentryinmanyaspectsofthebusiness,whichweexploreinthereport.
Industry Revenues Under Pressure:
Themusicindustryisaleaderindigitalrevenues,onlybehindgamesandwellaheadofnewspapers,ilmandmagazines.IFPIestimatesthat20%ofglobalindustryrevenuesaredigital.Lookingattheindustry’shistoricalbusinesspractices,weexaminetheimpactofthedigitaltransitiononoverallrevenues.Whilethenumberofunitssoldcontinuestoincrease,up11.6percentin2007(thelatestyearforwhichRIAAigureswereavailable),thankstothegrowthofdigital,thevalueofthosesalesdeclined11.8percentto$10.4billion.BasedonpreliminarydatafromNielsenSoundScan,unitsaleslikelyincreasedalmost10.5percentin2008,butwehavenodoubtthattheretailvalueofthosesalesdeclined.Musichasforeverbeenunbundledandtheindustryhasquicklymovedtowardsfreedownloads,unintentionallyofcourse.Thefullreportexaminesthewaystherecordlabelshavesoughttoprotecttheireconomicsondigitaldownloads.
The Future for Artists:
Anartist,whomightormightnotalsobethewriter/composer,usedtosignwitharecordcompany.Theircontract,ofwhichnotwoareprobablyalike,wouldstipulatethenumberofalbums/CDstheywoulddeliverduringaspeciictimeframe.Thecontractwouldtypicallybeoverathree-to-ive-yearperiod.Thelabelwouldlikelygivethemanadvanceagainstprojectedfuturesales.Therecordcom
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panytypicallypaysroyal¬tiesaftertheyhaverecoupedthecostofproduction,promotion,anddistribution,althoughagain,eachofthesepointsisheavilynegotiated.Recordlabelstypicallyalsoreducethesalesbaseuponwhichroyaltiesarecalculatedbyanother15percentforfreegoods(i.e.promotionalcopiesgiventoradiostationsorasquantitydiscounts).A25percentpackagingfeeisalsosubtractedforaCD.Theselasttwoitemsareahugepointofcontentionintheindustryasthemarkethasmovedonline.Withnophysicalcostofgoods,itisn’thardtoarguethatthereshouldbenopackagingfeeatall.Whilewecandefendthelabels’righttogetsomecompensationforpromotion,includingthenowalmostcostlessdistri
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butionofsongstoradiostations,itseemsintuitivethatthepercentageshouldbemuchlower.Thegoodnewsforartists,iftheyareentrepreneurial,isthattheyhavemanyotherwaystomakemoneytoday.Inthefullreport,welookattouring,tv/movielicensing,games,merchandisingandmore.Wealsolookatthevarietyofservicesbeingofferedonlinethatallowanartisttogetdiscovered,bookgigs,etc.
M&A and Venture Capital Activity:
Theinalsectionofthereportreviewsmajoralliances/venturesintheonlinemusicarenarangingfromimeemtolalatoPandora,Rhapsodyandmore.Wehavetrackedover150musicrelatedtransactionsoverthelastthreeyears(2006-2008)andhavepeggedthevalueofbothdisclosedandundiscloseddeals.Acquisitionsweremorefocusedoncontenttechnology,whileinvestmentsfocusedmoreoncommunity,distributionandtechnology.Wethinkoftheinvestorsasbeingmoreonthecuttingedgeanddobelievethatcommunityisincreas¬inglyimportant.Wedividedtheacquisitionsandinvestmentsintosixdistinctcategoriesinordertodetermineindustrysectorsthathaveseenthemostac
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tivity.Thereportprovidesgraphicalbreakdownsofthesesixcategoriesandestimatesthemoneylowingintoeachone.
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