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Music Unlimited billboard at Midem 2011
Stairway to heaven? The industry is pinning its hopes on streaming services such as Sony's Music Unlimited. Photograph: Lionel Cironneau/AP
Stairway to heaven? The industry is pinning its hopes on streaming services such as Sony's Music Unlimited. Photograph: Lionel Cironneau/AP

Music industry struggles to make digital leap of faith

This article is more than 13 years old
Major labels embraced streaming at Midem in Cannes last week, but some claim their moves are too little, too late

In the louche Martinez hotel bar in Cannes, a sharply dressed young man launched into a tirade against the music industry convention he was attending. "All you hear is these old men whining about the past," he said. "Well you know what? The genie is out of the bottle. You try and put it back in and you will die ... and then we will take over."

His was an extreme view, but at this year's Midem, Europe's biggest music conference, where artists such as Ra Black and Andrew A (pictured below), courted the press, there was an undeniable feeling of transition of power from music's old guard to its digital avant garde. But the problem is that even as the industry finally recognises that it needs to change, it is not clear that the digital future is strong enough to support the global rock'n'roll machine as it used to be.

In a keynote speech Jean-Bernard Lévy, the head of the media giant Vivendi which owns Universal Music Group, said the company was working to "reinvent the music industry", with 30% of its revenues coming from new business models, but admitted "the music business is still only part of the way to reinventing itself". Indeed.

Yet that reinvention is taking far too long, according to Forrester Research analyst Mark Mulligan, who gave an explosive presentation at Midem. "Unless the labels and publishers change the way they license services we are going to see the trend of dying CD sales and stalling digital downloads continue," he said. "Labels are going to have to feel the long-term pain before they start licensing as aggressively and liberally as they need to."

Mulligan said the music industry had to come to terms with the fact that its raison d'être – songs – was no longer the product it had to sell. "Content is no longer king. Its throne has been taken by experience. Yet how many music services really focus on experience?" he asked. Certainly the digital experience could improve. Digital startups complain that getting publishers and labels to license new services, such as streaming sites, is fiendishly complicated. Rights holders – the music majors – insist they are making the deals, but say they are being held to ransom, asked to make cut-price arrangements with hundreds of unproven services that only offer nominal revenue.

The result is that new investment money is no longer chasing startups focusing on serving up songs online. Fed up that licensing music content is such a byzantine process, many startups and investors are beginning to focus on services around the edges of music, such as Songkick, which lets fans know when bands are coming to town, or MXP4, a social music gaming service.

Of course, the labels vehemently deny dragging their substantial feet. Francis Keeling, the vice-president of digital at Universal Music, insisted the company wanted to work with the full gamut of startups, adding: "[We want] to make the licensing process fast, so that they can get to the market as soon as possible."

Yet the transition from a recorded to a digital music industry has been, at times, painfully slow. Spotify is only now edging towards a US launch, following a rumoured deal with Sony, after more than one stalled attempt. Others have been lost along the way – most recently, Sky Songs, BSkyB's music-streaming subscription service, which closed in December after failing to attract enough customers.

That has not deterred Sony which, in an event featuring big hitters from all the major labels, announced the rollout of its subscription service. Unlimited Music, which will cost from €3.99 a month for a basic plan to €9.99 a month for a premium service, with unlimited listening and the chance to make playlists. It will not, Sony said, follow in the "freemium" model footsteps of ad-supported services such as We7 or Spotify, because as Thomas Hesse, the head of digital operations and corporate strategy, succinctly put it: "Free doesn't make any money."

He has got a point. By the end of 2010 Spotify was estimated to have about 750,000 paying subscribers, up from 320,000 in March 2010, but has yet to make a profit; while its competitor last.fm made a pre-tax loss of £2.8m in 2009, a improvement on the £17m loss in the previous year.

And although Spotify reportedly paid out about €30m to rights holders and labels in the first eight months of last year, and in several European countries, such as Sweden, is now making more money for rights holders than Apple's iTunes Store, some artists and labels complain that their royalty cheques are paltry. The UK rights collecting society PRS for Music says only 4.9% of its revenue came from digital services in 2009, compared with 2.9% in 2008.

Worryingly for the industry, the growth in the digital market – once hailed as its saviour – appears to be stuttering. A report from the international music industry body, the IFPI, revealed this month that the global growth in digital music halved in 2010, with only "single digit" percentage growth in the more mature US digital music sector.

If this is to change digital services must lead future innovation, said Mulligan. "What other failed services have shown is that if you play to the record labels' rule book you get nowhere. These startups need to make their own rules, and not let the labels lead the conversation."

Back at the Martinez, that conversation was stilled for a moment as music executives and tech geeks alike stood and listened to a performance from the Guillemots during the British music showcase. With an irony not entirely lost on the audience, they finished their set with a song which insistently repeated the refrain "yesterday is dead". That is something that most in the music business now seem to recognise, but whether they can do what it takes to make tomorrow live remains to be seen.

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