Is Spotify another guide for the future of the music biz?

The record industry has been in a decline that the business blog has followed over the last few years. The rise of the internet has proven to be a process by which the old business model of the industry has been bankrupted. Gradually the record industry has had to move forwards or else face the risk of being wiped out.

Sales of digital music are growing, but not fast enough to offset falling sales of CDs, partly because of internet piracy. Record companies are realising that their efforts to get young music fans to pay up are not working.

Now a new website, Spotify, could provide a way for the business to make money in the digital age. (see BBC video clip)

The Spotify approach is different in that music is free, but you have to watch or hear advertisements for the privilege. Scarcely a revolutionary breakthrough, but perhaps it’s one of the methods that might allow the record companies to receive some income from their artists’ catalogues.

Jim has recently been discussing the issue of publishers offering free content.

A rival approach has been pioneered by Nokia who are selling handsets, starting at around £130, that are bundled with a year’s free online-music subscription, called “Comes With Music” (CWM). You can download music, and listen to it, on both the handset and your PC. Once the subscription expires at the end of the year, you can still listen to the tracks.

This works because Nokia licenses music from the four major labels and some independent record firms at a discount and adds the cost onto the phone’s purchase price.

Will this new business model work? If the record companies receive an estimated £3 per handset per month and Nokia sells 5m CWM handsets, the additional income would add up to £180m which is about 1% of global recorded-music sales in 2007 and 12% of the digital business. The potential market is far bigger: last year Nokia sold 146m phones that can play music.

But the bargain priced subscriptions may also only strengthen the widely held belief that music should be free. On the other hand, unlimited music services could help to reduce piracy, by making it unnecessary. Either way, it is a big step forward into the unknown.

Meanwhile, video games such as “Guitar Hero” and “Rock Band” are revitalising the industry, according to some. They raise revenue and help as an advertising platform. By providing exposure, previously obscure bands can achieve international fame and veteran musicians are able to reach the ears of a new generation.

According to Activision Blizzard, the video-game giant behind “Guitar Hero III”, bands whose songs are included in the game can expect online sales of their music to increase by an average of 300% as a result.

Aerosmith have made more money from “Guitar Hero: Aerosmith” than from any of their albums. Some people have even suggested bands should pay to have their music included in games. Metallica’s new album “Death Magnetic” was made available as a download for “Guitar Hero” on the day of its release. Such in-game downloads are typically sold for $2 per song, twice as much as the music alone fetches on iTunes, the leading online-music store.

But will it last? Music games, which burst onto the scene in 2005, could burn out very fast. But if the record industry is to survive, there will have to be some new ways for the artists to make money. It remains to see which approach(es) will work best.