The sound of the digital revolution

CAMPING OUT ON COMPETITION: Jean-Noël Reinhardt believes fair competition practices are vital for online digital industry growth (XAVIER WILSON)

The way in which consumers buy music is changing rapidly with more people shunning traditional CDs for digital downloads, according to President and CEO of Virgin Stores France Jean-Noël Reinhardt.

"CD sales have dropped by 50 per cent in the past five years, thanks to online digital sales and music piracy.

"If you analyse what has really taken a hit in sales, then it's the back catalogues because they are now freely available over the internet. The newly released albums still sell well in the stores," Reinhardt says as he purchases his first Arabic music album in Virgin Dubai.

Even though he can't remember the name of the artist, Reinhardt believes the singer would make a great addition to the online music store in France and the Middle East when Virgin goes digital here.

The enigmatic man, who is often looked upon as the pioneer of the online downloads market in Europe, freely admits the digital revolution has finally landed on our doorstep.

However, the trend is not limited to Virgin. While the United Kingdom retail giant Woolworths announced its decision to launch its digital music store in August and stop selling CD singles, locally, the Middle East has just welcomed Getmo Arabia.

The latter is the brainchild of Arvato Middle East Sales and Abu Dhabi Media Company, which serves as a new platform for users to download over three million songs, music videos, games and ringtones in English, Arabic and other Asian languages.

But it doesn't mean CDs will completely cease to exist – at least, not yet. In a statement, Jim Batchelor, commercial director at Woolworths, said: "CDs are alive and well for album sales, but unfortunately the physical singles market is in terminal decline. Our customers are starting to embrace the world of download, which is why we feel the time is right to launch our new digital site."

Woolworths' released figures show the singles market peaked in 1999 when 78 million CD, tape and vinyl singles were sold.

In 2000, 55 million CD singles were bought in the UK, but by last year this had dwindled to eight million. Increased online piracy has also played a large factor in this decline.

"Unfortunately, retailers will continue to take a hit from piracy until global restraining copyright laws come into place, which is an impossible task. About 15 per cent of our sales are lost to piracy every year," said Batchelor.

Interestingly, Reinhardt's reputation as a music pirate is legendary, one that eventually led him to pay a fine of €600,000 (Dh3.3 million) in 2006.

But Reinhardt walks a thin line here when he says: "Many may say the online movement has been fuelled by piracy, but we wouldn't exactly call it that. Its simply consumers looking for a new venue to obtain their music. Eventually, as a retailer we will reach a stage where we will offer free downloads from our stores. We are already taking a step in that direction in different ways, starting with product tie-ups where you purchase an iPod and in return obtain codes to download music legally from iTunes."

So what prompted him to illegally distribute Madonna's Hung Up through his online retail store in France?

"In a typical world, there are no fights over exclusivity deals. You can't sell CD albums in their entirety on the store shelves but in the digital world leave the cream of the crop for one digital retailer. That's why we had a very strong legal battle with a French telecom company. Personally and professionally, we have to protect our rights. We need to accept competition to ensure fair practices."

And although Virgin France lost the legal battle, this wasn't the only one Reinhardt initiated.

In 2001, the businessman took on Apple in protest over iTunes selling songs that were only playable on iPods. Reinhardt says: "The fight with Apple was more because of technical reasons. When a company has a leading position in a market and takes advantage of this strong position, then you are allowed to draw the battle lines. And even though we lost the fight, the court admitted that we had raised a good question but the laws weren't in place. But a few years later, the European Legal Authority put down a precedent for fair practices in the online digital download industry.

"However, there was unfair competition before, which is why a large amount of music played on iPods today is pirated."

While analysts say Virgin has lost ground in some aspects of online music selling, there is a digital platform that is gaining ground with independent musicians. In 2002, when iTunes was still marketing established artists through its digital store, Virgin decided to expand its horizons to discover French regional acts that were yet undiscovered.

Today, Reinhardt says there are between 3,000 and 5,000 independent artists on its digital platform, with a portfolio growing even larger by introducing international regional acts.

He says: "We want to give budding artists a chance to release their music, but we certainly don't exploit them. We will not pay them any less than we would pay a Mick Jagger or a Madonna."

Reinhardt is already anticipating the future of the digital music industry as more established artists choose to shun the record labels and release music directly online.

"These artists are very shrewd in their thinking. If they can market high quality music online for a price that is determined by the end customer, like what Radiohead did with In Rainbows, then customers will eventually choose quality over cheaper options."

So what does the future hold for the online music market in the Middle East?

"Each market has its own specificity.

"But what I do predict is the online gaming industry to expand, just like music did, and this market growth will concentrate on women and older people." And does Virgin supremo Richard Branson have a say in this?

Reinhardt says: "Richard Branson hasn't made decisions for a long time. His role is to inspire the brand. He has been doing that from the first day and he will continue to do so. But he isn't the manager, we are. So let him inspire the brand, and let us run the company."

The numbers

50%: Is the drop in CD sales over the past five years, as reported by Virgin. The figure is expected to rise as more retailers opt for online digital downloads

€800m: Is the revenue generated from industry music sales in France

€4.5bn: Is the revenue generated from industry book sales in France. President and CEO of Virgin France Jean-Noël Reinhardt says the French seem to prefer reading to listening to music

€600,000: Is the amount Reinhardt had to pay in fines after being accused of music piracy. He says the action was taken over his stand against an unfair online exclusivity deal

Online antics

Last year, the music industry took a beating when alternative rock band Radiohead (above) decided to release their album online and challenge the otherwise traditional distribution sales model that saw consumers purchasing CDs for a set price, determined by the retailer.

With In Rainbows, consumers were able to determine their own price for the album, and were then able to download the tracks from the band's official site for the album

Was this Radiohead move signalling the dawn of a new era in digital downloading? It certainly appears that way, earlier this year, as rockers Metallica toyed with the idea, Nine Inch Nails (above) entered the downloadable album arena when they released Ghosts I-IV directly online and for virtually nothing in terms of pricing.

A survey conducted by US-based Comscore showed that when not forced by retailers, consumers were enjoying a new-found freedom of choosing their own price and willing to pay more for their music.

That may serve as great news for the artists, but what does this signal for the industry at large? The jury is still out.