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| The case is made here that while individual music industry bodies may tend to put forward just one or two general reasons for the recent drop in CD sales such as piracy, new technologies, or anachronistic industry structures, record sales in the early 21st century are, in fact, affected by a host of much more complex, interrelated economic, cultural, technological and industry factors. In arguing his case, the author takes as his starting point the following two quotations : Mass-scale CD copying and piracy had a particularly sharp impact on music sales. There is no doubt that multiple CD burning poses a significant threat to the recording industry and to the copyrights of song writers, artists and producers and everyone else involved in the music business. (1) Jay Berman, IFPI Chairman and CEO We think the problem lies with the record companies. Instead of offering either singles or downloads through legitimate retailers, they offer neither, and simply increase the price on CDs. Retailers could have been competing with CD-burning and file sharing if they had been given the chance. (2) Pamela Horovitz, NARM President -------------------------------------------------------------------------------- ON 28th September, the International Federation of the Phonographic Industry (IFPI) announced first half sales for the year 2001. Disappointing to many, and not surprising to others, world sales of recorded music fell by 5% overall in value (6.7% in units), its first decrease in a decade. The IFPI primarily blamed CD burning hardware and websites offering illegal music downloads, especially peer-to-peer (P2P) networks. Implicit in the IFPI's blame of piracy, and decrease in worldwide sales, are consumers the very buyers of the recording industry's wares. Shortly afterwards, the U.S. National Association of Recording Merchandisers (NARM) issued a statement that paralleled the view of the IFPI in terms of a decrease in music sales, and the proliferation of CD-R and P2P. However, they placed the blame not on the consumer but the record labels themselves. NARM views the delay in the digital strategies of the major labels as having created a void in the supply of music online, thus illuminating the path that led consumers to "free music". While NARM and IFPI paint a black and white portrait of the reasons behind a decrease in sales, there is actually a multitude of variables at play, not all of which can be controlled. To understand the debate on piracy and music sales, one must first take a look at the blame game. For years now, various sides have been pointing fingers at one another: piracy vs. fair use; convenience vs. security; price vs. cost. Who is to blame for the morass in which the recording industry now finds itself? In no uncertain terms, consumers are, collectively, one of the culprits. But so too are websites and online services and the labels, of course, are no angels. Then you have technology, the economy, politics and a whole host of other factors. Let?s take a look at a few of them. The record labels have for decades operated as an oligopoly, meaning that a few firms have control over the chains of creation, distribution and promotion. The big five record labels EMI, BMG, UMG, Sony and Warner Music have, on the one hand, the finances necessary to develop and promote artists, and, on the other hand, the distribution channels that lead to consumer sales. It is common knowledge that if you want your product to appear on the shelves of a major U.S. retailer, such as Tower Records, or to be seen on TV as with MTV, or heard on radio (i.e., Clear Channel), you had better be affiliated with a major label, or else ... tough luck. Then came the Internet, which changed the dynamic of the record label/artist relationship. It provided an alternative channel, both promotional and distributional, that was not initially in the control of the major labels. Artists could be seen, heard and bought on an international level without the aid of a label, albeit, not on the same scale as the mass market media. Soon, consumers could download and listen to both new, undiscovered music, and established hits. In short, technology changed the whole equation. The Internet, broadband connectivity, and computer power and peripherals all had a revolutionary impact. Because the oligopolistic major record labels have traditionally had so much control over the market, they viewed their companies and business models as the status quo, and sacrosanct at the expense of change in adapting to the new models brought about by technology. First came the MP3 format and MP3.com, among others, then P2P networks and communal sharing. Now consumers could rip their favorite music and effortlessly share it with anyone who was interested. And there lies the first problem. Consumers were allowed to rip music from their CDs and house it on their computers in compressed digital files. From there, the files can be burnt onto blank CD-R's or shared over networks. The labels did not take the first step of protecting their CDs, that is until this year. Instead of going about copy-protecting their products from piracy, the record labels were playing a defensive game against consumers online. Only very recently have the record labels started testing copy-protection software for their CDs, with Universal Music Group announcing that it will utilize undisclosed technology to protect all its new CDs by the end of the first quarter of 2002. Had the labels taken an earlier approach to copy-protection, a Napster might have never developed. Further to the label situation, the next issue is demand, and supplying that demand simple economic theory, or so one would think. Due to the major labels' control over all major chains of distribution and promotion, they determined the music to which consumers had access. But with a defensive campaign underway, led by the RIAA in the U.S., the labels held back from meeting consumer demand for their favorite music to be made available online, in an affordable and convenient manner. By taking this rearguard action, the labels pushed consumers towards alternative sources for their music. As previously stated, digital music was the fix for the consumers and Napster (now Kazaa, Morpheus, and others) was the needle. By not allowing consumers to access music through legitimate channels, the labels pushed them towards the Napsters. Thus, the labels inevitably gave rise to Napster. Of course, P2P would have developed irrespective of the labels efforts, but with 70 million users at its peak, Napster would have never reach such stratospheric numbers without the help of the labels. Remember the initial uproar over parental advisory stickers, and how in the end they actually increased CD sales of "unsavory" music? So now we have explained how the labels created the P2P nightmare through uncompetitive policies of withholding music and not protecting their products in the first place. Now comes the issue of CD burning hardware. The IFPI, rightly, blames the spread of this technology for the piracy that has hurt sales the most. The part that is unclear, is whether the blame should be placed with consumers for burning CDs, mass pirates or both. One could reasonably contend that the blame increasingly lies with a new breed of smaller scale pirates. Before the CD-Rs, pirates needed huge factories, such as in China or the Ukraine, to produce a volume of CDs that could undercut the pricing of the labels/retailers and still bring in a huge profit. However, with today's CD-Rs, one no longer needs a factory. An apartment with multiple CD burners will do. Thus, the barrier of entry for pirating CDs was effectively lowered by new hardware technology. As of late, the recording industry has had successes in closing large factories, working in tandem with government authorities. But it is the small-scale pirates that are proving much harder. A personal viewpoint illustrates the situation. Let?s take Manhattan. Walk the streets of Broadway Downtown or 34th Street in Midtown, and you immediately see the problem. Tables are set up all along the sidewalk, with unauthorized vendors hawking illegal CDs. But these are special CDs they are perfect copies, in most cases, of the real product found in stores. Where once people worried about the quality of the bootlegs, this is no longer the case. What's at the top of the charts in Billboard and what's playing non-stop on radio can all be found on the street for $US5 and that's for an entire album, not a single. In addition, police view all this and do nothing. So, for the consumer, the impression is that what is being sold is done legally, because if the cops aren't preventing it when it's right in front of their eyes ... you get the point. Become a regular of one of these vendors, and the deals will role in: get 4 CDs for 10 bucks; the CD is scratched - no problem, return it and get a new one; want only the best instead of albums? - we've got compilations ... and it goes on. These are businessmen beating major corporations at their own game. If the recording industry is serious about piracy, it is time that they pushed local authorities to enforce laws that are already on the books, especially when the piracy happens right in front of their eyes. NARM raised a point that the record labels charge high prices for CDs. And when consumers increasingly become disgruntled at paying $US16 for a CD that has 2 or 3 good songs and 5 or 6 fillers, it is no wonder they revolt. It's like any good that is "necessary" (which many will argue music is). If you price it too high, people will turn to the black market same with cigarettes, medicine and cable. However, the labels have been reluctant to reduce prices on their CDs, because in part, these extra revenues help stem losses from piracy. When Mr. Berman states that "demand for recorded music is fundamentally strong, and it is getting stronger everywhere", you wonder why the industry has not tried to meet that demand by offering music through multiple channels in ways that entice, rather than repel consumers. And recent efforts including Pressplay and MusicNet almost certainly will entice consumers. Of course, the decline in music sales is also attributable to the overall downturn in the world economy. Latin America, Japan and the U.S. have all drifted towards (or are in) recession. Europe's economy has been a little stronger in the first half of the year, which accounts for their smaller decrease in sales less than 1% but the Continent is following the downward trend into the second half. On the other hand, the North America market saw a 5% decrease in sales, Latin America 20% and Asia 8%. In fact, EMI, which is predicting a 20% decline in profits for the year, cited the world economy and, specifically, Latin America for their troubles. Depending on the degree to which the economy is a prime factor, CD sales could rebound in 2002/2003. The mistakes of the labels in the last decade do not in themselves excuse the mass piracy of music on- and off-line by consumers, but it does go a long way towards explaining the problem and offering solutions. In the end, it comes down to consumer demand and meeting that demand in a quick and efficient fashion. The record labels must see the light and adjust their strategies. Give a little and get a lot more in return. After all, consumers can be very acquiescent. Just watch as they gravitate in droves towards every latest product that the labels push, from Britney and J.Lo to N'Sync and Ricky Martin. The writing is on the wall. It is now time that executives at the big five took the time to read it. -------------------------------------------------------------------------------- Sources of quotations : "Global Recorded Music Sales Down 5% in First Half 2001", IFPI Press Release, listed London, 28th September, 2001, at: http://www.ifpi.org "NARM President Pamela Horovitz?s Statement on IFPI Sales Figures", NARM Press Release, listed Marlton, NJ (USA), 28th September, 2001, at: http://www.narm.com/news/pressrelease.htm Sounni de Fontenay is Editor-in-Chief of MusicDish, a digital music industry e-Journal, and Chief Operating Officer and Publisher at Tag It? , a leading Content Service Provider (CSP) to the entertainment and new media sectors, also running Black Hole and 'LA'Ritmo.com Urban and Latin music magazines respectively. |
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