The Hype is Back!

The past three years in the music industry have elapsed like those of dogs. Music sales have decreased by a quarter, CD burners have proliferated, shipments of recordable CDs (CD-Rs) have surpassed that of pre-recorded CDs, broadband Internet access has grown, and both legitimate and illicit music downloading have burst into mainstream America. In this "hype today, demise tomorrow" environment, separating fad and speculation from opportunity based on empirical evidence is the key to surviving and profiting.

What does the new music paradigm look like? In 1999, Ipsos-Insight launched TEMPO: Keeping Pace with Digital Music Behavior, a shared-cost ongoing research program based on primary consumer survey data. This unique study measures the effects of online music distribution on the way consumers discover, listen to, and purchase music. The April 2003 TEMPO survey findings show that of Americans over the age of twelve:

• 30% have downloaded a music or MP3 file off of the Internet (this translates to roughly 65 million people in the U.S. alone)
• 58% have listened to a recordable compact disc (CD-R) on their car audio system (125 million Americans)
• 53% have listened to a pre-recorded music CD on a PC's CD-ROM drive (over 110 million Americans)
• 37% have listened to digital music files that were stored on a PC's hard drive (80 million Americans).

Further, digital music formats (including CD-Rs and digital music/MP3 files stored on a PC) now account for 16% of American music collections, with this proportion jumping to 34% among teens aged 12-17, and 30% among Americans aged 18-24.

These findings suggest that rampant media coverage of the Napster and file sharing phenomena coupled with the proliferation of PC-based audio hardware, have awakened Americans not only to the idea of downloading music from the Internet but, more importantly, to a broader view of the way music is currently sold, distributed, played, stored, and organized. In short, a fundamental shift in the consumer music paradigm, with the rising familiarity with the flexibility and ease of digital music empowering in ways unforeseen only a decade earlier.

How telling is it that the most significant music-related consumer electronics innovation in the past five years was not manufactured by an audio/video company, but rather a computer manufacturer! The release of Apple's iPod-with a hard-drive larger than some laptops-has overtaken the Sony Walkman as the device of choice among audio junkies, and its uses beyond that of simply playing music point towards a future for the music industry that involves more than just CDs and stereos.

And for companies looking to profit from this new music paradigm, signs of opportunity have arisen. The recent successful launch of Apple's iTunes Music Store has turned many dire predictions for the music industry into over-hyped forecasts (ironically reminiscent of the early days of Internet music) that music downloads will, in fact, save the industry rather than destroy it.

While "hype today, demise-tomorrow" commentary can desensitize one to the recognition of emerging trends, results from TEMPO in the past year have pointed to other opportunities In August of 2002, for example, the success of Apple's iTunes Music Store was foreseen when the use of discrete choice modeling in TEMPO showed that U.S. downloaders actually prefer а la carte transactions for online music, and that such a service would not only outperform subscription-only online music services that were pervasive in the market at that time, but also lure file sharers away from their illicit activities.

In addition, more recent TEMPO results reveal that while the proportion of overall U.S. downloaders who have paid for digital music is still small, it is growing, having doubled from 8% in December 2002 to 16% in June of 2003. The proportion is likely to increase even more in the coming months, with several online music services scheduled to launch Apple-like online music offerings.

Both the data from TEMPO and real-market developments suggest that a new consumer music context is indeed developing, with companies who are willing to understand the motivations of these music consumers and design products and services that provide value most likely to profit from its presence.