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HitQuarters' Primer to Digital Downloads and Distribution - Jul 17, 2006

"Last year the iTunes store outsold both Tower Records and Borders in the US"

picture As the global music market switches to digital sales, HitQuarters presents an extensive, essential, info-packed guide.

Learn about the explosion of iPod and the iTunes Music Store and how it affects you.

Find out about artists' royalties from digital sales.

Get introduced to some of the best options out there for uploading, selling, distributing and promoting your songs online.

Introduction

Sometime during the night of February 22nd 2006 the counter on Apple’s iTunes webpage recording the number of music downloads to date hit the one billion mark. The billionth downloaded track was ‘Speed Of Sound’ by Coldplay and the downloader was one Alex Ovstrovsky of Michigan, USA.

On the website the following morning, CEO Steve Jobs jubilantly proclaimed the event, “a massive milestone in digital music history.”

What is the significance of the billionth hit? And where has the unprecedented success of the iPod and the iTunes Music Store taken us? Are we on the brink of a full scale digital revolution?

The Digital Hub

In Apple’s vision of the future the home computer is the digital hub of our daily lives. All our gadgets, be it the digital camera or the DVD player, are constellations, orbiting round this entertainment centre. In the iMac, Apple Computer had the ‘hub’, and so at the turn of the century set about creating Mac applications to integrate the gadgets, and then ultimately creating also the gadgets themselves.

They identified that the area not supported by quality digital hardware was the music market, and so focused on firstly creating a digital ‘jukebox’ application - iTunes - and then an original integrating digital music platform. That product became the iPod.

The iPod

The first generation iPod was unveiled on October 23, 2001. It utilised a recent technological breakthrough of being able to fit a computer hard drive into a box the size of a deck of playing cards. The hard disk could then be used to store thousands of songs. This innovation inspired the iPod’s first marketing slogan, ‘put 1,000 songs in your pocket’.

Although it was not the first player to utilize this technology, (HanGo Electronics’ Personal Jukebox being an earlier example), its small size, portability, anti-skip protection and classic simplistic white design meant it quickly eclipsed the other portable hard drive competitors.

The date that was to have greater significance however, was April 28, 2003, the date Apple unveiled their 3rd generation iPod in Tokyo. Up until then the sales of the 1st and 2nd generation iPods had been good but nothing spectacular, a fact largely due to the iPod being compatible firstly only with Macs and then only PCs with the rare FireWire facility.

It was the 3rd generation iPod that sparked the digital download uprising we are in the midst of today. The new design was even thinner and smaller than before, featured the more compatible Dock Connector port, entirely touch-sensitive controls, a higher capacity and most significantly, it was compatible with Macs and, once the USB cable was released in June, all PCs, thereby dramatically increasing its potential marketplace.

As a consequence, PC users entered the iPod kingdom in their droves. Whereas it had taken one and half years from conception for Apple to clock up 1 million sales, it was only six months after the arrival of the 3rd generation iPod that they achieved their second million mark. The sales would continue this dramatic rise over the next couple of years, aided by the releases of the 2 generations of iPod mini and the forth and fifth generation iPods and the Shuffle.

By September 2005 they had reached 25 million worldwide and by the new year the count had topped 45 million, almost doubling Needham & Co’s analyst Charlie Wolf’s prediction for 2006 made only one year previously. On average, as of February 2006, Apple ships 6 million new iPods every 3 months.

The iPod has not only been a huge success in terms of revenue but also in its cultural and sociological impact. By the end of 2003 it was no longer just a cool little gadget for the geeky Mac user, it was a household item, a fashion accessory, the must-own gadget of the millennium, no matter whether the owner was computer literate or not.

Like the Hoover brand name becoming synonymous with the vacuum cleaner, ‘iPod’ had started to be used by many as a generic term for the digital audio player. It has been hailed as both the first iconic design and the first icon of the 21st century. PC World ranked it No.2 in their Top 50 chart of the best gadgets of the last 50 years. Books such as Leander Kahney’s ‘The Cult Of iPod’ have celebrated the phenomenon.

As with everything original, groundbreaking and successful, it inspired countless copies and rivals. Creative, Dell, iRiver and others introduced cheaper alternatives, but the sheer weight of iPod’s cultural force meant that these companies’ products made negligible impact on its sale growth or its stature as the digital music king. Ultimately it seems that it will take another revolutionary innovation to supersede the iPod.

The two phases of the iPod mini were another important factor in the evolution of the iPod. Between January 2004, when the mobile phone-sized 4GB player was first introduced, and September 2005 when the mini was replaced by the even smaller ‘nano’, the iPod mini proved to be the best seller in Apple’s history.

With its colourful and trendy design it succeeded in adding the coveted women and children demographic to the rocketing sales figures, and because of its light and resilient aluminium build, even athletes were swayed by its charms. The iPod’ sales were building and broadening fast. The success of the iPod, however, was only the first stage.

It may have symbolised a future of music where consumers buy online and reject pre-programmed albums for their own personally compiled play lists. It may have sparked countless articles and critiques on the new way we will listen to music and prompted obituaries for both the album and CD format. It may well have done all of this, but its actual impact on the music industry was still relatively small.

Apple had only made a success out of their digital music platform, not the sale of the music itself. Nobody was making any money out of online digital music sales. In a climate of steadily dropping album sales, the majority of consumers were still buying their music on the high street. The actual digital music revolution was only just beginning.

The iTunes Music Store

Apple’s original business idea was to create an MP3 player and then devise a Napster-like music sales service to complement it. With the MP3 platform successfully established, Apple introduced their digital music service, the iTunes Music Store (iTMS) and a library of 200,000 songs. It was unveiled on April 28, 2003, the same pivotal date that the 3rd generation iPod first appeared.

In the eyes of Apple the primary function of iTMS was not to make money but promote iPod by offering a convenient music service. Nevertheless its arrival effectively established the legal music download business, and thereby created an opportunity for the rest of the music industry to profit from an area that had up until then, in the form of illegal file-sharing, served only to pose a threat to their profiting.

The major record companies have been in a slump for the past six years, the point at which album sales first started to fall. This has been variously blamed on the number of ‘lost sales’ caused by file-sharing networks such as Gnutella and BitTorrent, CD burning and high prices.

In that six year period global record sales have suffered a 25% drop, with 2005 being an especially bleak year as, for example, the top 10 albums selling 40% less over the Thanksgiving weekend than at the same time the previous year.

This downward turn in fortunes can also be seen to be a result of not having orchestrated the 21st century consumer shift towards online digital music, unlike, for example, the move from vinyl to CD twenty years ago. Their only option in both fighting dropping sales and illegal downloading has been to embrace the new world of digital music.

Many consumers believe that the industry slump is of their own making and that piracy, cited as being the cause of it, is in fact a responsive action of those disenchanted with the greed of the music industry, who refuse to pay high prices for singles and albums anymore. This potentially destructive situation in effect created a gap in the music market, a market for a consumer who wanted digital music cheap and easily accessible via the Internet.

It is no coincidence then that when the iTunes Music Store was launched offering 99˘ music downloads it sold 2 million in its first 16 days. So when Apple announced its groundbreaking licensing deal with the five major record companies to its iTunes store, the industry could at last see a route out of their depression.

Up until now iTMS has succeeded in Apple’s original game plan, with its growth promoting the sale of iPods. However in its three year life span the world of digital downloading has not yet noticeably profited anybody. The Sales figures from 2005 show that although digital downloads from pay sites have increased 150% to 352.7 million units, and digital album sales have gone up 194% to 16.2 million, the actual total album sales during that period came in at 618.9 million units.

Therefore, in 2005 digital downloads still only accounted for 6 percent of music sold worldwide. And so in comparison with the rest of music industry sales, the digital download market was still relatively minor.

Nevertheless, the labels may not yet be compensating for their sliding CD sales with digital downloads, but judging by the astonishing rate at which digital songs and album downloads are increasing, it won’t be too long before they will. By July 2004 Apple recorded 100 million downloads and by October, 150 million, and the rate has been rocketing ever since.

By the end of last year it had reached 600 million. Last year the iTunes store outsold both Tower Records and Borders in the US. It would seem that Apple’s original plan to use the iTunes store to promote their iPod has worked the opposite effect too, the tremendous sales of the iPod have promoted the sales of iTunes downloads.

The Billionth Hit

The billionth download from the iTunes Music Store is a major milestone because it is in many ways the breakthrough point of the digital download revolution. For the first two and a half years since the store went live the number of legal downloads has increased spectacularly, but still not made sizable impression on global music sales, a fact not surprising considering the infancy of the marketplace.

However, the unprecedented pre-Christmas iPod sales, when the fiscal quarter results recorded more than 14 million iPods sold (resulting in a 64% rise in revenues from $3.49 to $5.75 billion), followed by Steve Jobs’ February 23rd billionth download announcement, are two events which mark the turning of the tide.

These benchmarks would have made everybody in the music industry take notice, especially as they are now a part of this revolution. The knock-on effects that the arrival of the iPod in 2001 provoked, are now starting to happen. Digital downloading has now entered the mainstream.

The Death of CD?

It is too premature to predict the demise of music in its physical form or to think that every consumer will be converted to the iPod, the download and the digital hub. The swift rise of the digital download industry will inevitably be capped by the sheer diversity of consumer and their various quirks.

The world that the iPod and the iTunes Music Store have for the most part created is primarily populated by the under 30s, many of which do not remember a world before the Internet. Although the iPod, with its easy-to-use trendy design, has made substantial advances in broadening its sales demographic over the years, its audience is still ultimately limited. The coveted free-spending 30-40-something male, for instance, still buys CDs in shops.

One major reason for this is content. It is easy for record companies to make current chart music available online but they are slower at working through their back catalogues. John Lennon made his debut online last November in an effort to tempt the older generations to test the digital waters.

However it is still early days and much greater advances into the pop catalogue will need to be made. Classic rock/pop music such as Led Zeppelin and most importantly The Beatles are still not available at on-line retailers. Whilst this remains the case there will always also be a doubt as to whether digital is a credible format.

In time however, once the younger demographic grows older and the older CD-buying consumer fades away, it is likely that the world of digital downloading will slowly dominate. That is until the iPod and the iTunes Music Store are superseded by the next revolutionary innovation.

And the Royalties?

How does the change from the physical CD format to the digital download affect the earnings of artists and songwriters?

At the present time the big factor affecting artist and composer royalties is the change in music consumer spending. When iTunes arrived in 2003 offering the revolutionary new concept of single $0.99 downloads it sparked a massive increase in so-called ‘single’ sales (misleading because they are not necessarily traditional chart singles, as many having been ‘cherry-picked’ from albums).

And so whereas CD album sales continued to tumble at a rate of 7.2% last year, single track sales rose dramatically, with 352.7 million individual songs sold online last year, a 150% increase. This shift affects the artist/composer royalties because, for instance, an artist could make between $2-3 per $16-18 album, but with a standard $0.99 iTunes download they would only earn between 12-16 cents.

This would therefore have a damaging effect on an artist or composer’s royalties if the average consumer decided to spend $3 on three tracks from a album rather than buy the whole album. However, the enormous sales rise of the $0.99 download (and steady rise of the $9.99 album download) suggests that although artists and composers, and the record company as a whole, might lose out in the short term, its unlikely they will continue to do so in the near future.

What will have the greater effect in the long term, when digital downloads start to reap significant profits for the record companies, is the artist and composer royalty rates. At the present time there is not a major difference between artist and composer/songwriter royalties for digital sales and physical sales.

For example, songwriters, composers and music publishers currently share 11-15 cents per track for every physical CD sale whereas in the new digital world a $0.99 download would net 9-11 cents for the creators. This amounts to composers and publishers collecting a 9% cut from a physical sale and 8% for digital. But is the relatively slight change to the royalty rate justified?

Are the major record companies being greedy by holding on to old established and outdated practises when the music market has evolved? With downloads being sold across the digital ether instead of over high street shop counters there is no need for record companies to dip into the royalty pot for packaging, production or distribution costs.

Surely then there would be greater profit margins, and consequently a greater proportion left for the artists and composers?

But then with the relatively rapid shift to online, the record companies are supposedly having to invest heavily into new technology to support the changes, such as the legal online services. They have also been spending large amounts of money to combat the surge in internet file-sharing piracy.

But is this all set to change? The British Phonographic Industry (BPI) and the Music Alliance (UK royalty collection agency), are currently locked in a dispute over songwriter royalties for online sales. Last year the BPI launched a legal action proposing to halve the royalties due to writers and then six months later the Alliance submitted a counter claim demanding that the rates instead be increased.

Although the immediate outcome of this dispute will only affect UK registered composers and the UK music industry its repercussions will unquestionably be felt worldwide.

Digital Music Distribution

Some websites offering digital distribution of your songs for iTunes and other music stores. Note: this is not a definitive guide – more an outline of different deals available.

CD Baby

Think of it like traditional physical distribution: you are the label (you own the music and all rights). The retail store is now iTunes, Rhapsody, Yahoo, ringtone companies, etc. CD Baby is just the distributor that gets your music to the retailer. CD Baby will never tie up your rights or make it hard for you to leave. There is no startup cost. This is a free service for CD Baby members.

CD Baby pays you 91% of all income from your music. Just like in the physical world, there can't be more than one distributor bringing the same album to the same store. Otherwise, when the album sells, how would the store know which distributor to pay?

If you sign two digital distribution deals with two companies that will both be sending the same album to iTunes, Rhapsody, Yahoo, Napster, etc - this will hurt you, because the retailer will usually remove the album completely until you decide which distributor has the exclusive right to be selling that album through them.

HitQuarters tip: 91% of the revenue is a lot! Probably the best deal out there. The downside is that it has to do with selling CDs through them, although there's a workaround offered.

IODA

IODA allies independent rightsholders - labels, publishers, musicians, and songwriters - to negotiate licensing agreements with the vast array of digital music outlets such as iTunes, Napster, Rhapsody, Yahoo Music Match, etc. IODA's collective bargaining power enables independent rightsholders to receive more favorable terms than would otherwise be possible.

IODA is a digital distributor, with the primary goal of making music available to fans via digital ‘retail stores’. Independent labels send their music (CD's or Vinyl) to IODA, which then distributes it to the myriad of download services available. IODA represents sound recording rights whereas publishers represent only compositions.

IODA receives a portion of the license royalties paid out by the services in exchange for ongoing rate negotiation, catalog encoding and data management services, precise and comprehensive reporting, and the administration and distribution of royalties.

HitQuarters tip: IODA has the most partners, therefore a trustworthy service.

TuneCore

A TuneCore account gives you access to your own private space where you can list your albums and songs, design or upload your own album cover image etc. When your songs or albums sell, iTunes and the other music stores/services track how much you've earned. Every month they send that data (and the money itself) to your page.

HitQuarters tip: TuneCore offer a different deal - you pay a fee per song and per store to TuneCore, but you get 100% revenues. It may work better for artists who are confident of their sellability, but many Independent artists, who have no idea how to handle the business, need to feel the security that someone is looking out for them.

That can be the situation only with partnership deals where revenues are split, so it's clear that it's the best interest of the service to sell. How can an artist know that Tunecore are really working for his distribution?

Turmic Records

A Non-exclusive worldwide agreement. A Marketing team in place, with close relationships with the music programmers. Deals with over 100 legitimate digital download services, as well as ringtone/realtone providers. After being accepted, artists send their single, E.P. or album CD. Standard offer is a 70/30 split of any income in the artist's favor.

There is an administrative fee of 125 Euros for the first master, 35 Euros for each following master. If Turmic believe that an artist has the potential to succeed internationally, they might offer a deal where they absorb part or all of the administrative fee in lieu of a higher percentage of their download income. No distribution to artists that Turmic don't believe are commercially viable or have not made acceptable recordings.

Many artists are going directly to download sites themselves because they think that they will save money. What they don't factor in is the time spent on each distributor. With Turmic, an artist becomes available to all the most important sites around the world with one simple agreement.

HitQuarters tip: Turmic filter requests, meaning they have to like you to distribute you, and the revenue share deal is to their favor (they get up to 30%, not to mention 100+ Euro fees).

Additional companies worth checking out: Ingrooves, Labeltools, Digital Music Group.






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