This year’s MetroFM Awards confirmed that  DJ Cleo is the king of digital. This musician extraordinaire won yet another award for topping digital download sales charts, in addition to similar awards he scooped at the last 3 SAMA’s. I am now convinced that  he has mastered the art of selling his music through this alternative channel.
Just as an aside, Cleo’s noticeable absence at the 2011 Metro FM Awards lead me to think at first that this was staged. I imagined him popping up on one of the event’s screens, connected  on Skype or Ustream or something, just to illustrate that MetroFM – the largest national urban radio station in South Africa – is moving with the digital times. But, it turned out that there was a real story behind his absence, which is not the subject of this post.
As I was reflecting on Cleo’s continued success with digital downloads, I wondered whether he is making more money than other artists who are selling less or none of their music through digital downloads. This is a key question given declining local and global recorded music sales.
Scratching the surface lead to my discovery that the topic of music digital downloads is a minefield the whole world over. I do touch on this on this post, but I made every attempt to keep focus on the subject matter.
COMPARISON BETWEEN TRADITIONAL AND DIGITAL DOWNLOAD MUSIC REVENUE DISTRIBUTION MODELS
An example of how the R100 you pay for Cleo’s CD album at a retail store is distributed between him and other stakeholders in the creation and distribution channel, is an ideal starting point.
Source: The South African Music Business (2007), by Jonathan G. Shaw, page 70.
Please note, I am aware that there is an updated edition of the South African Music Business book, but I took a view that the typical revenue distribution model presented in the table above has not changed. In addition, my revenue distribution model example excludes money made from live performances, merchandising sales and sponsorships, which is a major source of income for all well-established artists such as Cleo. Lastly, I have discounted in this analysis that Cleo’s record label is an indie, which increases his chances of negotiating a better digital download deal, as this can apply to the non-digital music distribution deal as well.
- The one element that is least likely to change in the revenue distribution model for both traditional and digital download channels is the royalty bearers share, which relates to the rights associated with the creation and production of music.
- Cleo’s record label is saving at least 8% in the cost of distributing his music through the digital download channel, which owes to lack of need for physical packaging of it.
- In rear cases Vodacom, MTN,  and other large digital download services receive music directly from musicians. These digital distributors retain between 15% and 30% of download revenue, depending on subscription or pay-as-you-order purchases. But, in most cases there are distribution agents involved, resulting in 30%-40% retention of download revenue covering distribution costs. My good guess is that the bulk of Cleo’s download consumers are on mobile prepaid plans. If he uses digital distribution agents he may not be saving money from this revenue distribution line item.
- Savings are likely from record company margin line item, as Cleo may not need to pay as much, or at all, for marketing, selling and other overheads given that the digital download platform owners tend to take care of the large part of these activities.
The quick analysis above shows that digital downloads are potentially – this being the operative word – more profitable than the traditional distribution model. Thus, Cleo is making more money from his music overall, due to higher contribution of  digital downloads, compared to other relevant artists who do not sell as much through this alternative channel.
REALITY CHECK
Question is whether Cleo should sell his music exclusively through digital downloads due to the higher revenue per unit potential as analyzed above? A simple answer is NO, and it is based on the following reasons:
- Music digital downloads channel is still limited in South Africa (estimated at less than 10% of total sales in 2009) and the whole world at this stage. IFPI’s 2011 digital music report shows that contribution of digital downloads to global music trade revenues was 29% ($4.6 billion) in 2010. In South Africa’s case, low internet penetration, costly bandwidth and lack of big digital download players such as iTunes Music compound this limited access.  Thus, Cleo will be missing out on a big portion of the music buying market by going exclusively digital. It is estimated that digital downloads will grow to more than half of total music sales by 2014. But, it would still make sense to include brick-and-mortar in Cleo’s music distribution channel strategy even at that stage.
- IFPI clearly points out in its 2011 report that digital technology has an unacceptably high contribution to music piracy, and this is enabled mainly by illegal file-sharing and peer-to-peer networks. As an example, it is estimated that in Brazil, 44% of music digital downloads were illegal! Music piracy is an even bigger headache in developing countries, South Africa included, due to lack of capacity to effectively police it.  This may explain why Cleo is one of the artists on the forefront of the current anti-piracy campaign. The Zahara fake CD on the left was downloaded from Google Images
- Production of albums will still be a norm for some time in the music industry, and especially for established artists like Cleo. Digital downloads in South Africa are mainly on a track and not album basis currently. I am of the opinion that revenue from popular downloads from a full album, which is on average 4 tracks, will not make up for creation and production costs of the other 8 not-so-popular tracks in the same album that are not downloaded. This may be seen to be bad for consumers who buy albums and are saddled with some of the tracks they do not like as much, but that is just how the cookie crumbles.
IN CONCLUSION…
The analysis and reality check relating to digital downloads indicates that this alternative channel has a place in the music industry and can have higher returns for artists. However, the channel still has limited access and cannot compensate for not using the traditional distribution channel. In addition, this channel’s key shortcoming is its porous nature that leads to high incidences of piracy, which essentially means all the hard work put into creation and production does not pay off as consumers download the music for free.
My observation has been that digital downloads is great as a fire starter and for incremental sales. It works better for new and small independent artists who cannot afford high costs associated with distributing their music through the traditional channel.
For a global perspective on music digital downloads, read The IFPI Digital Music Report 2011.
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