For almost a decade now, the major labels (at the beginning there were
five of them, now only four, EMI, Sony BMG, Vivendi Universal and Warner) have declared that illegal downloading is ravaging their business by destroying the sales of physical product. One may question this declaration, however, in few of the fact that ever since the RIAA filed its 1998 litigation again the manufacturer of the Diamond Rio MP3 player and extending to its most recent lawsuits against individuals across the country, the music industry has committed more public image faux pas than Dan Quayle and George W combined, making it one of the most hated industries among high school and college students. It should be apparent to everyone now that it is not illegal downloads that is causing the downturn in music sales, as there are many other contributing factors.
This marred image is evident. According to an article in Rolling Stone magaine entitled The Record Industry’s Decline:
About 2,700 record stores have closed across the country since 2003, according to the research group Almighty Institute of Music Retail. Last year the eighty-nine-store Tower Records chain, which represented 2.5 percent of overall retail sales, went out of business, and Musicland, which operated more than 800 stores under the Sam Goody brand, among others, filed for bankruptcy. Around sixty-five percent of all music sales now take place in big-box stores such as Wal-Mart and Best Buy, which carry fewer titles than specialty stores and put less effort behind promoting new artists.
Nonetheless, a new research study on the issue, commissioned by the Canadian government to explore issues related to copyright reform, was recently released. The study is entitled The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada, and was written by Birgitte Andersen and Marion Frenz, of the Department of Management at the University of London in England. A PDF version of the study is published here.
The results of the new study affirm many of the conclusions found in an earlier study entitled, The Effect of File Sharing on Record Sales: An Empirical Analysis. This paper was published in the February 2007 issue of The Journal of Political Studies, and was written by Koleman Strumpf, professor of business economics at the University of Kansas Business School and Felix Oberholzer of the Harvard University Business School. Both studies directly contradict the claims of the music industry that file sharing is related to revenue losses.
In fact, the new study supports an opposite assertion, i.e., that distribution of music files on P2P networks actually promotes the sale of physical product. Andersen and Frenz found, among people who actually participate in P2P file sharing, downloading actually increases the sale of physical product by a ration of 2 to 1, in other words, on average when a P2P file sharer downloaded the equivalent of two CDs in files, he or she would purchase of one physical CD (Note: I have extrapolated here, as the numbers set forth in the study actually say that for every 12 P2P songs downloaded, physical purchases increased by 0.44 CDs). It is important to note that the study concluded that, when incorporating the Canadian population as a whole (i.e., including the group who participate in P2P file sharing along with those who do not), file sharing on P2P networks has neither a positive nor a negative impact on CD sales.
One fact in the report I found very intriguing is its conclusion that the owners of MP3 players are less likely to purchase physical product. This is interesting, in my mind, because I believe it is connected to the popularity of the iPod and iTunes. If a person purchases the iPod and uses iTunes, there is really no need to buy physical product, whereas when a person uses a different brand of MP3 player, he or she is, in my humble opinion, more likely to go out in search of alternative means of finding music, including purchasing CD’s. I would like to see a study which compares iPod owners with owners of third party MP3 players. It may turn out that the biggest culprit in the demise of the record industry is Apple!
One story I found really revealing is the Rolling Stones article on The Record Industry’s Decline. In it, the author tells the story about how the major labels were unable to come to a settlement with Napster which would have given them immediate access to Napster’s 38 million users. I don’t know the details of that meeting, but it seems to me that when the industry burst that bubble, those 38 million users disbursed into millions of subgroups on P2P networks so varied that it become virtually impossible to get the magic back. Hindsight is, of course, always better than foresight, but this event certainly seems to me to one of the biggest turning points in our industry’s history.
Is the music industry going to survive. Of course! It will certainly not be in the form many traditionalists in the industry wish it to be. CD’s eventually be ancient relics of the past, sought after by collectors much as jazz lovers currently seek out old vinyls and record players. The radio industry will not have control over marketing and thus the role of radio consultants on the industry will be diminished. Marketing efforst will shift to television outlets and Internet marketing. Search engines and online communities will continue to surface new music and expose the long tail. Major labels will no be the sole repository of the major talent, as independents will rise to fill the void, fueled by venture capital from investors. Whatever happens, it going to be an interesting ride!
Some further reading:
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August 19, 2008 at 9:57 pm
Stephen
Yes they did dig their own grave, sort of. I feel that the RIAA went about the MP3 revolution very wrong. Most of my predictions on this have come true, and I predicted this situation back in 1998! I feel that the biggest mistake they made was failure to license Napster, Scour, MP3.com, KaZaa, LimeWire, and others like it. Many P2P companies were willing to pay artists, but the labels just wanted to put them out of business. That was mistake #1, as decentralization and open sourcing took over the P2P world, what happened after Napster was a variety of P2P systems that are built with no central server and therefore can’t be killed by suing the developers of the software. Additionally, many P2P developers decided to go for intercompatible sharing protocols and open sourced the code to those protocols. This lead to even more fault tolerant networks, and allowed others in the open to pick up where one developer left off. It also allowed people with P2P clients from different makers to share files with each other. Additionally, many P2P developers allow manually typing in the IP address of another user to connect (which can be residential users) which makes no company for the RIAA to bankrupt to disable the sharing functions.
Next of all, DRM was a total failure. I predicted this back in 1999. I feel that consumers had already set standards for digital music, and they choose the open MP3 format. THe problem was the music industry did not want to adopt it, which made tracks from pirate P2P services more valuable because they worked with every program and every portable player. Consumers did not like DRMs limitations, which eventually lead to class action lawsuits and practical problems when DRM servers shut down.
Finally, these copyright laws were set by lobbyists in which they created laws in which the general public did not want to adopt. This lead to public trust of the RIAA and its member companies to wane. I feel that if they would have licensed P2P from the get go, and been more willing to work with small companies and open source developers things might have been different.