So this story hit the news a few days ago, but I’ve been busy eating turkey, so I didn’t get around to posting it until now. Atlantic Records announced that sales of their music from digital downloads are now greater than those from sales of physical CDs. They are the first of the major labels to be able to make this claim, though this day has been a long time coming, and no doubt the other labels will reach this milestone in the relatively near future, whether they care to or not.
Atlantic clearly deserves praise for reaching this milestone first — most of their brethren’s digital sales as a percentage of overall sales trail Atlantic’s substantially, closer to the 20% range, indicating that Atlantic is further down the road in re-tooling their business for digital. Nonetheless, I think Atlantic is being a bit disingenuous in touting this as an accomplishment — I could claim that wise investment choices in my muni bond portfolio in the past year have led to it becoming a majority of my holdings, rather it was the meltdown in the equity market that caused my bond allocation to overtake my equity allocation. Cold comfort when the overall pie has shrunk disastrously.
While the continued strong growth of digital sales is promising, this isn’t wholly good news for the labels: while their digital revenue streams may be growing quickly, their CD revenues are declining even more sharply — the NY Times article I link to above quotes NBC Universal’s Ed Zucker apt characterization of the difficulty old media businesses are facing in their digital transition as “trading analog dollars for digital pennies”. (Note: As I was posting this, I noticed Fred Wilson recently wrote a post with this quote as a title, so clearly Zucker’s quip is a bit viral).
To survive, the major labels will need to significantly restructure over time to adapt to the (rapidly approaching) day when CD revenue becomes a small minority line of their businesses. As Ian Rogers, CEO of Foundry Group portfolio company Topspin Media eloquently put it, “the physics of the music industry have changed”. The tools of production and distribution have been democratized. The leaves talent and the ability to identify it and market it well (by building strong relationships directly between artists and their fans) in the digital world as key differentiators in the music business going forward. The labels, artists, artists’ management and new entities that will emerge who don’t fit in any of these categories who embrace this new reality are the ones who will prosper going forward.