One Way to Save the Music Industry

Given the persistence of digital music piracy, a new subscription-creation model borrowed from online gaming could aid ailing record labels

By Johnny Ryan and Allègre L. Hadida

Does the answer to music retailing's collapse lie within the computer game industry? Global music revenues suffered a 10th year of decline in 2009, with sales and performance rights falling to $17 billion. In contrast, revenue from the computer game industry's sale of portable and console hardware, software, and accessories rose from $7.98 billion in 2000 to $20.2 billion in 2009 in the U.S. alone. The music industry may find inspiration in the game industry, where the prevailing Internet-driven trends of online subscription and community participation are reducing piracy and keeping consumers actively engaged.

The first illicit encoding and online distribution of music using the new MP3 standard in 1996 was a landmark event for the music industry. From this point on, music retail has been a dwindling pursuit. In the U.S. alone, shipments of music fell 12 percent from 2008 to 2009, to $7.7 billion. The decline is greater still if one excludes digital distribution from this number: Physical distribution, mainly CDs, fell 21 percent in 2009. In response, the music industry has attempted to embrace digital distribution. Yet despite expanding from virtually nil in 2001 to 27 percent of global sales in 2009, the digital distribution of music has not reversed the overall decline in music sales caused by the plunge in physical distribution and the rise of online piracy.

Legislative "graduated response" or "three-strikes" measures may eventually limit illegal downloading. These are targeted at peer-to-peer downloading, however, which accounts for only 20 percent of illegal downloading and is easily replaced by other means of file sharing. Moreover, legislation to introduce such measures is proving difficult to pursue in a number of jurisdictions. Other initiatives, such as offering free access to music as part of subscription deals with ISPs, may yet produce dividends. Nonetheless, if the music industry is to continue to be a dynamo of creativity, it must do more than simply protect its decaying position. The computer game industry and its approach to participatory entertainment may provide the music industry with strategic alternatives to compete with illicit downloads.

Deepening Sense of Community

The computer game industry's approach to subscription has married conventional subscription entertainment service models, such as monthly payments to premium TV channels, with social club models, such as annual fees for a golf club. The result is a two-sided network in which game co-creation and players' rivalry and collaboration increase the value of the subscription to its holders over time. Members of the 11 million strong World of Warcraft gamer community typically pay close to $170 annually to play, on top of an initial investment in software and upgrades ranging from $50 to $195 per player. As subscribers continue to play, three factors keep them hooked: Their prestige grows among other players of the game; they can access more challenging content; and their connection to the online community grows broader and deeper.

Many other games are similarly leveraging the power of community to maintain subscription figures. Xbox Live, Microsoft's (MSFT) online subscription service for owners of its Xbox console, now boasts an active membership topping 20 million players. At least half of these pay for Microsoft's premium service, Xbox Live Gold, which costs $60 to $90 per year. To understand what this means in a practical sense, consider that 2.2 million subscribers were online at the same moment in December 2009, playing against each other. The game Call of Duty: Modern Warfare 2, in which teams of players confront each other on virtual battlefields, offers a bare minimum in the way of community-building. More experienced players can select upgraded weaponry to hunt down their peers. This game alone enticed players to invest more than 1.75 billion hours of game play in the six months since November 2009 on the Xbox platform—no doubt further billions of hours were spent playing the game on Sony's (SNE) PlayStation and on PCs, too.

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