Is Mark Mulligan Dr. House? — "Music Industry Braces For the Unthinkable"

Pivoting off of Forrester analyst Mark Mulligan’s sobering Midem presentation —“Music Industry Meltdown: Recasting The Mold” — on the slowdown and disappointments of Digital Music, The New York Times piles on and amplifies the meme this morning:

After another year of plunging music sales, record company executives are starting to contemplate the unthinkable: The digital music business, held out as the future of the industry, may already be as big as it is going to get.

We are at one of the most worrying stages yet for the industry,” Mr. Mulligan from Forrester Research, continued. “As things stand now, digital music has failed.”.

Music executives disagree, saying there is hope, as long as they can come to grips with piracy, which according to the industry federation accounts for the vast majority of music distributed online.

Around the world, 10 million people have already signed up for subscription-based online services from Spotify, Rdio and Deezer, some of which have attracted additional millions of users with free, advertising-supported services. Many executives hope the growth of offerings like these can reduce the industry’s dependence on sales of individual tracks through digital stores like Apple iTunes, a model that has attracted little interest from young music fans, particularly outside the United States.

Mr. Mulligan said tougher (piracy) enforcement would succeed only if music companies and other rights holders, including collecting agencies that represent artists and composers, embraced digital services that met the needs and interests of consumers, particularly teenagers and young adults.

Rights holders have grown more flexible as industry sales have collapsed, but they remain reluctant to license their music to some services. For example, Spotify, a popular streaming service in Europe, has yet to sign the record company deals it needs to open a U.S. site. Meanwhile, Internet companies like YouTube have sometimes struggled to reach agreements to show music videos in Europe.

With growth in digital revenue slowing nearly to a standstill, analysts say, it is no surprise that talk of mergers and buyouts is again swirling around some of the Big Four music companies — Universal, Sony, Warner Music Group and EMI. Warner, for example, is said to have hired bankers to explore a sale of the company or a purchase of EMI.

“What has been keeping labels afloat has been the digital story,” said Mr. Mulligan, of Forrester Research. “If, all of a sudden, what they have been telling the market is the future turns out to be a failure, that radically changes the conversation.”

The Final Take: For industry executives, Mulligan is simply painting an accurate picture of the elephant already in the room. Digital sales have slowed, and the dream of digital revenue neatly replacing physical is just about over. But, if you dive deeper into Mulligan’s comments than the NY Times did this morning, he does offer hope on three levels:

1-Third Party companies will invest more money in Digital Music in 2011. Mulligan argues that this creates fertile soil for labels and publishers to toil, if they are willing to loosen up licensing criteria and embrace these new entrant companies as relevant business partners.

2- The success of YouTube and (arguably) Spotify gives hope to the idea of monetizing legal music access. I would certainly add Pandora to this list.

3-Mr. Mulligan argues that more anti-piracy laws will be passed  if rights-holders willingly embrace new model entrants who offer legal user experiences relevant for teens and young adults.

The Final Take: From my seat, this sounds like a typical episode of the medical drama “House”.  The patient is clearly dying — on that everyone can agree. The show opens with confusion, and then a stretch of in-fighting regarding symptoms and possible treatments. Then Mulligan, a la Dr. House,  storms in with the unconventional diagnosis and tough medicine. In this case, abandon the belief that the RIAA or Apple will save this patient, and instead start licensing those new model companies who will provide the right medication to turn the industry around.

Only time will tell us if Mulligan’s approach is pure quackery or a legitimate cure.

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