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Assessing the Digital Music Market Reality

According to the latest research from Strategy Analytics Digital Media Strategies service, the global online music market will grow 62 percent this year, to reach $2.7 billion, and will ramp to over $6.6 billion in 2011.

Strategy Analytics believes that while the U.S. represented almost three quarters of the global market in 2006, the U.S. share of the market will have been reduced to less than half by 2011.

"The recent move by EMI and Apple to drop DRM from premium tracks will produce a temperate increase in single track download revenues in the short to medium term," comments Martin Olausson, Director of Strategy Analytics Digital Media Strategies service. "However, long term revenue growth will come from hybrid subscription based services."

"The music labels are finally starting to see digital sales having a positive impact on the bottom line," adds David Mercer, VP and Principal Analyst at Strategy Analytics. "This year will likely be the turning point for the music industry, and a return to overall revenue growth."

In contrast, I'm finding it hard to imagine a cohesive business strategy that will enable the traditional recording industry players to fully benefit from the apparent changes in the marketplace. For too long they have acted as the gatekeeper of the industry, using conformity and scarcity tactics to carefully control the closed-loop supply and demand of their predictable offering.

As the open-access direct to consumer model (D2C) became a viable alternative for independent recording artists, the recording industry's initial reaction was to fight and block the then nascent sales channel that enabled this unwelcome competition. Even though recently they have focused less on fighting this change, and more on attempting to embrace the change, they are still in a reactive mode.

Frankly, it's impossible to assume a leadership position in the digital media revolution when your prior agenda was to contain and delay the transformation from the legacy environment, at all costs. When consumers view you, and your peer group, as the primary obstacle that not only stands firmly in the way of progress, but places your vested interests ahead of theirs -- then your fate is sealed.

I don't doubt that the recording industry executives have, by and large, moved beyond their denial regarding their ability to maintain their status-quo gatekeeper role. Regardless, the apparent fragmentation of available content sources in the marketplace has created a situation where there's less need for players with their distribution-centric business model.

They may have caught up to the market reality, however, both recording artists and their consumers now pay them less attention. It's an interesting case study of how a distribution channel can misinterpret their significance and power within the value-chain. No doubt, MBA students will be discussing the outcome of this strategic misstep for many years to come.

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