European digital music meltdown threatened

21 Mar 2006

Digital music will account for 16pc of total recorded music revenues by 2011, a new report from JupiterResearch forecasts. However, high rights costs, low operating margins and intense competition will force a major consolidation in the European digital music marketplace.

Although digital music is an important new revenue stream for record labels, it currently only accounts for 2.2pc of total European music revenue. Despite this, JupiterResearch says the European digital music industry is now established with returns of €192m in 2005.

High label licence fees coupled with large operating costs and too many digital music stores chasing too few consumers will threaten the long-term economic viability of many existing European digital music services.

With numerous additional costs such as marketing and payments to consider, operating margins for Europe’s digital stores typically range from just a few percentage points to negative rates.

As a consequence, the current model is biased towards companies such as device manufacturers and ISPs that do not depend solely upon digital music revenues but instead can lean upon alternative revenue streams to offset low or negative digital music margins.

Additionally, supply exceeds demand. At the end of 2005 there were approximately 200 European digital music services, pursuing an average revenue opportunity of €960,000 per service (€260,000 minus rights costs). However, given Apple’s iTunes Music Store’s dominant market position, the actual revenue opportunity is much smaller for most services.

“With European CD sales still declining in 2005 digital music is an invaluable means for record labels to register revenue growth and consumer demand is clearly growing: by the end of 2006 14 million Europeans will pay for digital music,” JupiterResearch research director Mark Mulligan explained.

“Digital music has the potential to be a vital part of the music market in 2011 but to enable the market to get to that stage greater imagination is required from all elements of the value chain to make selling digital music an economically viable business for all partners, not just for record labels.

“Record labels must strike the balance between securing solid digital revenues and ensuring retailers can run profitable businesses,” Mulligan added.

By John Kennedy