New NARM Report Outlines the Future of Digital Distribution

According to a report just released by the National Association of Recording Merchandisers (NARM), Digital distribution—particularly streaming technology—will seriously disrupt the music industry, but has the potential to "benefit all segments of the business if companies can leverage their traditional strengths and create compelling consumer value propositions."

The new study, entitled "Creating Industry Value from Digital Music Distribution," focused on the three technologies at the heart of the distribution shift: file sharing, downloading, and streaming. NARM says that the insights and recommendations are based on in-depth interviews with industry participants (e.g., labels, retailers, wholesalers), published secondary research, and past experience working with other industries facing similarly disruptive innovations.

The report finds that digital distribution, while allowing consumers to access and experience music in a fundamentally new way, is currently "inferior" (i.e., lower sound quality, complex process) but rapidly improving. Even so, the impact of digital distribution on the music industry will be much more significant than earlier "sustaining"-type innovations (i.e., product enhancements that improve core features of existing technologies).

The study estimates that, over time, the cost savings realizable by record labels that distribute music digitally rather than as separate CDs could be as much as $3 per album. However, the report states that "in the near term, cost economics are likely to be unfavorable due to required infrastructure investments. Greater cost efficiencies will be gained over time." Elimination of returns is cited as the biggest cost savings from digital distribution, but the largest component of a label's cost—promotion, advertising, and publicity—will probably not change.

Michael Norkus, from Emerald Solutions' Strategy Group (who conducted the study for NARM), concludes that "assuming piracy is contained and technology issues resolved, the overall impact of digital distribution appears to be positive. Although some cannibalization is likely occurring among certain consumer groups, there are benefits through greater exposure and points of purchase. In the final analysis, some industry segments will be better positioned to succeed than others, and while incumbents certainly have the experience, resources, and relationships to win, they may lose out to new entrants if they don't give consumers what they want."

Norkus adds that "as a sampling medium, file sharing seems to increase consumer exposure to music, while downloads offer a new alternative for storing, transferring, and listening to music. But we see streaming as presenting the greatest concern for industry incumbents, especially the retail segment, because it provides a new opportunity to listen-on-demand without the constraints of physical ownership."

Other findings: Despite the benefits digital distribution provides consumers, mainstream adoption will take time, and will be influenced mostly by Internet and broadband use by consumers. For the foreseeable future, CD album and digital music sales will co-exist. "Over time, however, digital distribution—and, in particular, streaming—will gain traction. Because multiple strategies and business models (physical equivalent, agent retailing, subscriptions, 'free' music) will co-exist and no individual industry segment is likely to provide the consumer with a total solution, it will be vital for participants to forge partnerships with other industry participants to strengthen their positions."

NARM president Pamela Horovitz sums up the digital distribution revolution, stating that "entertainment retailing is currently facing one of the most significant challenges in its history. The Internet presents artists, labels, wholesalers, and retailers with a tremendous opportunity to innovate products and create powerful new marketing and distribution engines, which result in more personalized relationships with consumers. But meeting these challenges will have a dramatic impact on industry structure."