Plugging The Gaps In The Mobile Music Market
By Steve Wallage, Mon Jan 24 15:00:00 GMT 2005

Although record labels seem to be embracing and supporting the mobile music market, they still have a lot of doubts and concerns. Normally, the Internet can provide some guidance as to what may or may not work in the mobile industry, but for the record labels, the lessons from the Internet are still far from clear.

A statistician could have a field day with the conflicting data in music sales. In the UK, offline album sales were 237 million in the year to September 2003. The corresponding figures in 1993 were 150 million, and in 1978, 107 million. Although 2003 sales were helped by the supermarkets getting into CD sales with heavy discounting, the figures hardly point to the death of the sale of the physical CD. No less a figure than the former CEO of the Motion Picture Association of America, Jack Valenti, has said that the music industry will be dead within four years, yet legal online downloads have been boosting music sales.

It is also important to try and put Internet sales in some sort of context. Although the figures vary widely, for the major record labels, Internet downloads typically reflected something like 2-5% of sales in 2004. Even over the next three years, most forecasters don't expect this to surpass 10%. Digital sales are clearly having a major impact on the record labels, but no one in the industry is quite sure how this will play out. It is already bringing consolidation -- there are now four major record labels with the merger of Sony and BMG, and Warner Music Group (WMG) is halving its number of artists. Yet, the longer term picture is far from clear.

Along Comes Mobile Music

Into this picture of great uncertainty has come mobile music. A year ago, talk among the record labels was of whether this was an opportunity or a threat. There was also a real sense of whether this was really important to them. Many in the music industry can remember getting excited about the mobile channel in the past, only to find that the demand just wasn't there.

The thinking has now changed -- mobile music is clearly an opportunity but the jury is still out on just how big it is. Optimists tell the record labels that mobile users are using to paying for content, piracy can be controlled and the potential market is much larger than the Internet. For the record labels, the plan is to stamp out the possible threats from mobile music, and start exploring some of the opportunities. To achieve the former, the record labels are making sure they do something, create the business models and pre-empt the rise of new players.

One lesson that all the record labels would agree on from the Internet is that they cannot ignore the threat of new channels -- they have to do something. One other benefit from the Internet is that all the major record labels have digital divisions, which are the natural homes for mobile initiatives. Even though many in the music industry are unsure about future mobile music models, they are making sure they are not simply ignoring it.

By moving quickly into the mobile music market, the record labels can help define it. Four major areas of concern are payment, original content, mobile as the direct channel and copyright.

On payment, the jury is out on how happy mobile users are to pay for content. One positive example comes from the mobile IM market, where early indications in the US suggest that users are happy to pay SMS type prices for something that is free on their PCs. The record labels want mobile users to expect to pay for mobile music, although they accept that things like clips and previews can be free.

On original content, there has long been mutterings among players in the mobile industry that, given the quality of much mobile music, cover versions would be fine for most users. The record labels are naturally keen to ensure that mobile users demand original content.

Another potential threat to mobile music has been that users would download music onto their mobiles directly from their PCs. The record labels want to ensure that mobile music is distributed over the air.

On the issue of copyright, record labels range from the slightly paranoid to the highly paranoid. Although some are exploring new models, the record labels want clearly to make mobile users understand their copyright position. New models they are tentatively embracing include that from aggregator Musiwave. It has implemented a DRM technology that allows legal "super-distribution": users can send Musiwave's content to other mobile phones in encrypted form, but the recipients have to pay for it to be decrypted.

Two words destined to upset any record label exec are "mobile Napster". In fact, Napster already has a mobile service, but the fact is the record labels want to ensure they are not second to the market. Competition could also come from unusual sources, such as U2 mixing their own ringtones, or Madonna setting up a mobile content store.

One key indication of this is the sheer number and variety of partners the record labels are working with. They don't think all will work, but they are trying to make sure they are represented across the market. Take WMG: it is working closely with mobile operators like Vodafone, handset vendors such as Ericsson and aggregators like Musiwave and Melodeo.

So what are some of the other opportunities the record labels are looking at?

Helping Non-Mobile Sales

As the vast majority of record label sales will remain offline for the foreseeable future, a key area of interest is how mobile music can help offline sales. A piece of research by analysts Jupiter conducted several years ago showed that for every item bought over the Internet, six items were researched and then bought offline. Increasingly, record labels will use mobile music previews and mobile advertising to promote the sales of CDs.

Record labels are also seeing mobile music as part of a multi-channel approach. SonyBMG is a good example of this. It is providing Sony StreamMan with integrated Internet and mobile content. It is also hoped the StreamMan service will encourage the sale of Sony handsets and speakers.

This shows the level of experimentation from record labels as they strive to see what works. Universal Music is setting up as a MVNO in France, called Universal Mobile, to attract younger users with its music content. EMI is working with retailer Carphone Warehouse to pre-install memory cards with a whole CD plus some video. Independent record label Chrysalis is pioneering a scheme in the UK where listeners to its radio stations can have music they have just heard on the radio downloaded to their mobiles.

Mobile operators' interest in music is clearly not just about revenue -- it's also about reducing churn and helping make the case for 3G. Equally, the record labels have different agendas than just revenues. Key to them is that they get the basics right on mobile music and do not jeopardize their existing sales. Mobile music remains interesting to them, rather than a proven and important revenue stream. They are trying, and will continue to try, lots of different business models. If mobile music starts hitting the optimistic expectations, they will start putting far more energy into this opportunity. And they may start dropping many of their early partners as a new mobile music value chain evolves.