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The Internet's $10 Million Mix Tapes
By _ETHAN SMITH_
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.
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_
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
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
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
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
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
"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."
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