Is the music industry dying?

An anecdote in a recent Economist perfectly summed up the problems facing the major music labels. After EMI, the smallest of the Big Four, invited a teen focus group to its London headquarters in 2006, it wanted to give the teens something for their time. The response is worth quoting in full.

At the end of the session the EMI bosses thanked them for their comments and told them to help themselves to a big pile of CDs sitting on a table. But none of the teens took any of the CDs, even though they were free. "That was the moment we realised the game was completely up," says a person who was there.

Given the years of declining revenues at the major labels and the constant stream of stories in the mainstream press about music's decline, you'd be forgiven for thinking that the music industry's pallbearers are already lined up and waiting in the hallway. But music isn't on its deathbed yet; in fact, people are listening to more artists than ever before, on more white earbuds than ever before, in more places than ever before. They're just not paying as much.

Don't put all the blame on file-swapping, either, or chalk the problems up to an inability to "compete with free." Digital music sales soared in 2007, and in fact, the total number of "units" moved during the year increased over 2006. eMusic, the number two music download service in the US behind iTunes, doubled its own projections for the Christmas season, pushed out 10 million tracks in the month of December, and added 50,000 new paying customers in the last six months.

And all of this happened without the four major labels even offering DRM-free tracks online. Now that Sony BMG has finally capitulated, 2008 is poised to be the year digital goes so mainstream that even your parents use it.

All that good news means that music is alive and well—but it doesn't mean that things are rosy at the major labels. Let's run the numbers from 2007, then do a case study on eMusic's recent results to see just what kind of success can be had in the digital download world by competing with free.

Major label blues

Revenues at the four major labels (Warner, EMI, Sony BMG, and Universal) have been on a slow decline throughout the decade. From 2002-2006, the majors' revenue declined by 11 percent even as movies held steady at the box office and video games grew. Despite the downturn, the chart below makes clear just how large the major label music business truly is.