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The Internet's $10 Million Mix Tapes 


 
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By _ETHAN SMITH_ 
(http://online.wsj.com/search/term.html?KEYWORDS=ETHAN+SMITH&bylinesearch=true)  

 
 
 
 
 
As the music industry struggles to find its way in the digital era, it is  
seeing unlikely trailblazers in the likes of Beethoven, Mozart and Bach. 
Last year, the classical-music charts were dominated by two distribution  
companies: the world's largest record label and a five-year-old, 
Stockholm-based  digital company with 43 employees, no performers under contract and 
virtually no  profile in the broader music business. 
The contrast between the giant Universal Music Group and the tiny X5 Music  
Group AB offers insight into the future of music distribution. 
 
 
 
 
 
 
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Traditional labels like Universal, a unit of _Vivendi_ 
(http://online.wsj.com/public/quotes/main.html?type=djn&symbol=VIVDY)  SA, tend to focus on new 
releases and CDs,  which last year represented 73% of total U.S. album 
sales. CDs accounted for  nearly 54% of all recorded music sales, when paid 
downloads of individual songs  were measured, too. 
X5 releases no new music and sells no CDs. Instead, it licenses  the 
catalogs of about 50 other companies—most of them small classical labels  based in 
Europe—and repackages their recordings into compilations, sort of like  
classical mix tapes. It sells music only through online outlets like _Apple_ 
(http://online.wsj.com/public/quotes/main.html?type=djn&symbol=AAPL)  Inc.'s 
iTunes Store and _Amazon.com_ 
(http://online.wsj.com/public/quotes/main.html?type=djn&symbol=AMZN)  Inc.'s MP3 store, with cover art designed to  stand 
out even at the thumbnail sizes displayed on the services. And most of  X5's 
collections, even those with 50 and 100 songs, are priced below $8. 
Several X5 compilation titles include the word "classical" so they will  
appear prominently in search results. Some of the distributor's biggest hits  
include "The 99 Darkest Pieces of Classical Music," "The 99 Most Essential  
Classical Pieces for Your Mind" and "Classical Music for Meditation and 
Yoga."  

 
 
(http://online.wsj.com/article/SB10001424053111904009304576534711415540824.html?KEYWORDS=Naxos+Classical+Music#) 
X5, a record company that makes digital compilations of  classics like 
Beethoven and Mozart, has shown growth even against the backdrop  of a sales 
decline for the classical genre and an uncertain time for the music  industry. 
Could digital mixtapes be the Internet music of the future? Ethan  Smith 
reports.

X5 and music executives who have followed the company's rise say the 
approach  could be a model for other record labels: Package music specifically for 
 distribution online; focus at least as much on older music as on new mu
sic; and  make sure potential customers find that material. 
"Every step, from contracts to distribution to marketing to how the 
products  should look and be composed—everything is probably going to be different" 
in the  industry, X5 founder and Chief Executive Johan Lagerlof says.  
Digital downloads represented less than one-quarter of classical-album 
sales  last year, according to Nielsen SoundScan. Yet 13 of X5's digital-only 
albums  were among the genre's 50 top sellers for the year. That's the same 
number  Universal Music had, and as many as the three other major label groups 
 combined. 
Classical-music label Naxos of America Inc. earlier this month became the  
first in the U.S. to license its catalog to X5. Naxos Chief Executive Jim 
Selby  says the decision to go into business with X5 was motivated in part by 
a desire  to learn from the upstart label. "Can you make a profit selling a 
digital-only  product? Well, yes, because X5 is doing it," Mr. Selby says.  
X5 is in advanced talks to license Universal Music's classical-music 
catalog,  according to people familiar with the matter. 
Companies that make CD compilations also sell them online, including Savoy  
Label Group LLC and Putumayo World Music, which started sales Tuesday. But 
few  if any have designed their businesses around digital sales the way X5 
has. X5  executives say their low overhead, attention to detail and strategic 
marketing  have made the company profitable every year it has been in 
business. At $10  million last year, its revenue remains modest, but it is on 
track to grow 50%  this year. 
That growth is set against a backdrop of sales declines for the classical  
genre even steeper than in the broader music industry. Classical CD sales in 
 2010 dropped 33% from 2009, to 6.9 million. Even digital-album sales fell  
slightly, to just over two million. Overall album sales fell 12.8% in the 
same  period to 326.2 million. Sales have edged up slightly so far this year. 
 
X5's financial backers include Northzone, a Scandinavian venture-capital  
group that is also a major investor in the popular online music service 
Spotify  AB. 
X5 is expanding, with a new office in New York and plans to branch out 
beyond  classical music into folk, bluegrass and other niche genres. The New 
York  office's main goal is to strike licensing deals with U.S. labels that 
specialize  in other categories.Scott Ambrose Reilly, the head of X5's U.S. 
operation, says  that the top result when searching on iTunes for "folk" isn't 
folk music at all:  It's an album by an alternative-rock group called 
Monsters of Folk. "Search  'world music' or 'folk music' and you'll see what the 
opportunity is," for  offering compilations, says Mr. Reilly. 
X5's Stockholm-based staff of 10 producers has churned out more than 5,000  
classical compilations, creating as many as 400 in a week. The producers 
often  rely on sales data to determine, for instance, what should go into 
compilations  like "The 99 Most Essential Chopin Masterpieces," which was ranked 
No. 1 Tuesday  on Amazon MP3's classical best-sellers chart. Priced at 
$1.29, the collection  has ranked among the site's 100 top-selling classical 
albums for 20 months.  
To be sure, not all of X5's tactics are universally applicable. Clearly 
most  labels can't turn a profit selling their music for a little more than a 
penny a  song.  
X5 is hardly the first record company to build its business around 
low-priced  compilations—the practice is nearly as old as the music industry itself. 
But it  has adapted to the digital era in ways that create significant 
opportunities for  growth. 
Whereas traditional record labels focus on creating new hits through costly 
 marketing campaigns, Mr. Lagerlof realized that older material could be  
inexpensively repackaged nearly endlessly online. 
Unlimited digital shelf space creates its own challenges, says Mr. 
Lagerlof.  In an online store carrying 10 million to 20 million songs, even older 
songs  need to be promoted or they'll sink. "You have to work for your catalog 
 constantly," he says.  
Mr. Lagerlof, 40 years old, is well acquainted with the old approach to the 
 music business. As a dance-music producer and songwriter in the 1990s, he 
was  behind several Scandinavian pop hits released by a Swedish-Finnish 
comedy rapper  named Markoolio. As Mr. Lagerlof sees it, his label's most 
important customers  may be those who have the most to learn about the genre he 
specializes in. 
"Younger people looking for older music; it's very hard for them to find," 
he  says. "They don't know the artists, the composers, the labels." 
Write to Ethan Smith at [log in to unmask] (mailto:[log in to unmask])  






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