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.