Research Notes

Record Companies that are barking up the wrong tree will not survive

Most record companies are barking up the wrong tree by focusing on Internet lawsuits that they hope will help to maintain their traditional business. But their traditional business of selling music on CD’s through retailers is on a downhill roller coaster ride and there is nobody at the brakes. Record Companies are seeing their turnover from CD sales decrease by up to 15% a year, while in some countries, the sales of blank CD’s is now exceeding the sales of recorded CD’s. Latest figures show a global market value for overpriced ringtones at $1.5 billion. A market that the record companies are spending fortunes on promoting the artists that consumers enjoy and then buy a ringtone with. The only trouble is that the record companies are only getting a tiny royalty from the sale of a ringtone featuring say the theme from an artists new single, while footing the marketing cost and seeing their CD sales decrease. It is the mobile operator or often a small third party company that actually sells the ringtone and earns the revenue.

Ringtones and logos are what really boosted the markets for mobile services and on many markets today still account for around 25% of the total mobile services revenue. But according to our latest report ” How to make money on mobile services ” that figure – which is already on the decline – will fall to as little as 8% in 2 or 3 years as ringtones become a common commodity, thereby depriving the record companies of the already meagre royalties they are getting today.

What are the record companies doing? Many are focusing on how to stop the Internet cannibalisation of their traditional business, by throwing lawsuits at young kids downloading music on the Internet and trying to close file sharing sites like Kazaa and Napster. Attempts at “joining the gang” and setting up online sites distributing music with some sort of payment or subscription deal, have had little – if any – success.

As CD sales continue to decline, despite the lawsuits, the record companies will have to look forward and see how they can migrate their business into an MP3 orientated online world and start generating new revenue streams to compensate for the decline of their traditional revenue.

The biggest problem with Napster and indeed almost everything else on the Internet was the lack of a business model. Consumers are just not used to paying for most of the content on the Internet and as long as users can go somewhere else where it is still free, getting users to pay for content on the Internet is going to be a long uphill haul. But in the mobile world, users have been paying for content from day one and have no expectations of getting free content on their mobile phones.

Two of our latest reports “How to make money on mobile services ” and “The Korean Mobile Market, a window to 3G” both point towards that users will spend much more money that they are today, when high-speed java based mobile phones with colour screens are available. In Korea, they have had a “3G” market for nearly 2 years with these types of phones and users are spending on average 5 times as much on new mobile services, than they did with 2G monochrome terminals and sms based services. Music is already among these new services and has a huge potential if there is an ongoing development of innovative services evolving around the music offerings. In our report “How to make money on mobile services ” which focuses on how the European market for mobile services will develop up to 2005, the market for audio and video based mobile services will grow steadily in the coming years – reaching a value of Euro 1.2 billion in 2005. But that figure is based on that the content providers and the mobile operators form partnerships – the mobile operators need to understand that they must offer attractive revenue and business models – and the record companies need to look forward on how to offer their music and music videos in entertaining and innovative mobile service packages.

The record companies were bypassed on the mobile ringtone market, which is now on the decline and have almost given up trying to make anything profitable work on the Internet, but should be able to see that they are the people who stand to gain the most from developing and growing the market for mobile music services. Those record companies who start looking forward at the possibilities on the mobile marketplace, will stand a much better chance of survival than those that continue the battle for their traditional market.

Through workshops and the latest reports Strand Consult has published, Strand Consult is helping International record companies and other media companies, focus and capitalise on the growing mobile services market.
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