Beethoven Goes Digital

Classical music hardly seems like a growth business. We're forever reading about how concert audiences are graying, and new artists must flounce around fiddling in tank tops and platform heels to get attention (think Vanessa-Mae and the gals from Bond). In fact, classical music is doing a lot better than you might think. Although total sales in all music categories (on- and offline) fell 5 percent last year, classical sales grew by a whopping 22 percent. "When I talk to people in the industry, everyone is making money," says Klaus Heymann, chairman of Naxos, the world's biggest independent classical-music company, based in Hong Kong.

Why are Heymann and his peers singing such a different tune? Because classical retailers have been the best at exploiting the potential of online revenue. The biggest companies of the classical genre are now earning about 20 percent of sales from digital music, double or triple the average for other categories. This is a tremendous advantage for them, since selling music in the digital format can be twice as profitable as it is offline due to the extremely low costs of digitally producing, storing and distributing music. The bottom line: while this may well be one of the worst years for music sales in general since charts were started in the 1960s, most classical labels expect revenue to continue to rise.

Musically speaking, the classical genre has proved to be ideal for a digital era. The classical customer is technologically savvy and more likely to buy in bulk, and the viral nature of the Net has allowed the music to be heard by new audiences, fueling overall sales. "The classical-music sector has done a very good job of maximizing the opportunity of the Internet," notes Mark Mulligan, a digital-music analyst at Forrester Research.

It's a great example of how companies are putting the "long tail" theory of cybercommerce into action. In his 2006 best-selling book "The Long Tail," Wired magazine editor Chris Anderson explored how the Web helps some industries boost revenue by selling a few units of many things. That strategy is a sharp contrast from the traditional "big hits" model common in the publishing, movie and music businesses. When 80 percent of revenue comes from 20 percent of inventory, media companies rightly focus on their hits; that's why record labels generally push a few artists very hard. For decades, that 80-20 rule limited what retailers would stock on their limited store shelves.

But now that an endless number of less popular songs can be kept on a server at little cost, companies are able to profit from less popular fare. Classical fits that bill—more of its fans like to geek out on niche recordings, reveling in different versions of the same work or finding obscure versions of well-known pieces. Of the 146,031 tracks offered by Naxos online, about half have sold only 10 units or less. Still, that was enough to push digital revenues to a quarter of the company's total $82 million in sales for 2006, increasing profitability and helping offset a decline in offline sales. "We could live very comfortably if from tomorrow we never sold another CD," says Heymann, a serious classical buff who started Naxos 20 years ago.

Maybe not that comfortably: physical recorded music, like CDs, still account for three quarters of revenues at Naxos, just like at most record labels. Its distribution unit sells not only its own material from prominent artists, but also that of other independent classical labels like Artek, which represents the Seattle Symphony and the Liverpool Philharmonic, and BIS, a specialist in Scandinavian and Baltic repertoire. These types of recordings might have to fight for shelf space at a shop, but they're welcome additions to Web retailers that thrive by offering plenty of choice.

Indies like Naxos have been the most aggressive online, but even at Decca Label Group—the classical division of Universal, the world's largest music company—the digital-music business now contributes a fifth of sales. This is in part because illegal peer-to-peer file sharing hasn't hit classical music at all, a sharp contrast to the way it has decimated the pop industry. Low-quality tracks, which are often uploaded as smaller files on networks like LimeWire and Gnutella, aren't a problem when you want to listen to relatively banal stuff like Britney. But they don't cut the mustard for complex orchestral compositions by Bach—the nuances and length of such pieces make them much tougher to share via peer-to-peer. Classical also benefits from the fact that most users want to buy an entire album, rather than a single or two. They may also want to download the liner notes, background on the artists, the recording venue and the composer. A pop song can be enjoyed for 99 cents, while a piece of classical music will likely cost more than $10.

Of course, none of this will save the recording industry from its larger problems. Classical-music sales are about a fourth the size of country's, and barely 10 percent of rock's. Still, the success of companies like Naxos have provided a case study in how to optimize profits. "Joan Tower: Made in America," a Naxos recording of the U.S. composer's work conducted by Leonard Slatkin of the National Symphony Orchestra, stayed in the top 100 on the classical charts for more than a month, rising as high as No. 47. That meant selling merely tens of thousands of copies, but because the distribution costs are low, it may be one of this year's most profitable items.

The lesson for labels is that prepackaging global pop stars isn't the only way to profitability, and the result might be more exposure for a broader number of artists. EMI digitalized some of its rare historical recordings by the late opera great Maria Callas, and Decca is resurrecting long-extinct labels like Argo and L'Oiseau Lyre in downloadable format.

At the same time, some industry watchers believe digital might also help create more classical megastars. Witness the rise of Lang Lang, a young, spiky-haired Chinese pianist who topped iTunes' charts in mid-May. The fact that he ended up on iTunes' main page helped push sales of his new album, "Beethoven Piano Concertos Nos. 1 & 4," even further into the top 15 of the general iTunes charts. "When you see Lang Lang right next to Toby Keith and 50 Cent, all of those artists get a chance to reach the consumer," notes Christopher Roberts, chairman of Decca.

Meanwhile, labels are working on the next big digital challenge: how to let consumers search a really long tail of recordings. Mike McGuire, vice president of Gartner Industry Advisory Research, notes that virtually all systems of organizing online music data were "designed for three-minute pop or rock songs." Finding a particular piece of Spanish piano music composed between 1850 and 1920 or looking for multiple movements that add up to a single title requires more-sophisticated technology. That's something Naxos developed for its own businesses, but is far from the current standard of popular digital-music retailers.

The upside of this is that the digital revolution could give smaller labels like Naxos yet another way to level the playing field—by selling or licensing their own proprietary technology. Niche search technology is one of the hottest areas of technology development at the moment. A classical label that can score on that front may find its audience—and its sales—get a lot, lot bigger.