Forecast: the evolution of the digital music industry

1. Summary

The music industry has been in trouble for a long time. U.S. sales of recorded music peaked a decade ago, and today they are less than half the size they were then. Digital music sales — including sales of downloads and subscription services — have been the only growth area recently, but they haven’t been enough to drive the industry in a positive direction. In fact, digital music has been fairly sluggish, dominated by Apple’s iTunes store, which has been only marginally innovative since its debut, in 2003. But now, aided by smartphone proliferation, new entrants are aggressively pushing alternative business models.

This report examines the U.S. digital music market’s key disruption vectors: the areas where large market shifts are occurring and where companies will position themselves to gain share and increase revenues.

As digital music services go mobile and into cars, the most important disruption vector in digital music will be anywhere access. Other critical disruption vendors include social-media-based discovery and two business models, paying for access instead of ownership and subsidization. These vectors will take some time to play out, but the overall industry should finally return to growth within the five-year forecast horizon, as digital music spending, driven by subscriptions, will average double-digit yearly growth to total $4.1 billion in 2015. Top disruptive companies to watch include Spotify, Pandora, MOG, Rhapsody and Facebook: They are the ones best-positioned to take advantage of the disruption vectors.