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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 artists have more opportunities than ever to make it without the
backing of a label.

• Transaction activity in the music industry has been robust from 2006-8 with over
150 deals.

• The music industry is still searching for a business model as the Internet has canni-
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 in
this arena.
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 transition. 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-
eration of digital downloads and unfortunately the related problem of piracy, estimated at 95 percent of all
downloads. Specialty music retailers have filed 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, film 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 figures 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 specific time frame. The contract would typically be over a three -to-five-
year period. The label would likely give them an advance against projected future sales. The record com-
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-
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 final 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-
tivity. The report provides graphical breakdowns of these six categories and estimates the money flowing
into each one.
Full Report Contents:

I. Highlights

II. Introduction
An Industry Only a Newspaper Analyst Could Like?
The Impact of the Internet has been Dramatic
Industry Revenues Under Pressure
Music Industry is a Leader in Digital Revenues
Table: Global Digital Revenues by Industry
The Technology Disruption Happened Quickly
Traditional Industry Participants Have Consolidated
Safe to Invest?
Seismic Shifts Toward Uncertainty

III. This Report

Table: U.S. Ringtone Sales
Table: Selected M&A and Investment Activity, 2006-2008
The Value Chain, or How the Labels Chase a Higher Percent of Zero
Table: 2008 Year-To-Date Record Company Market Share 2008
Chart: Worldwide Recorded Music Sales (IFPI)
Burden of Digital Shift Felt by the Entire Industry
Table: Recorded Music Unit Sales
Industry is Adapting & Innovating
Table: Market Share by Retail Category
Table: Music Entertainment Sites Ranked by Unique Visitors
What’s an Artist to Do?
Services Exist for Artists to Go on Their Own

IV. Review of Major Online Music-Related Ventures

Amazon MP3 Store imeem MySpace Music
Apple-iTunes lala Napster
eMusic Last.fm Pandora
Facebook Microsoft-Zune Rhapsody America
iLike MOG YouTube

V. Review of Deal Activity 2006-2008 (14 Pages of Analysis/Charts)

The full version of this digital music industry analysis will provide you with valuable
information to support your decision making in this tough environment over the
coming year.

To purchase the complete report

please visit paidContent.org/Reports or click here.

© 2009 ContentNext Media, Inc.