The record industry blames piracy and downloading for sagging sales — here's the whole story.
By James K. Willcox
Source: http://www.soundandvisionmag.com/articl ... cle_id=453
Turn on the radio and chances are you’ll hear a top-selling song from a rock, country, or hip-hop artist. But stroll through the offices of almost any major record label and you’ll hear an entirely different kind of music: the blues. After nearly a decade of unfettered growth, music sales are down for the second year in a row. And if the Recording Industry Association of America (RIAA) is to be believed, downloads and piracy are the verse and the chorus of the music industry’s current sad song.
By the Numbers
Placing the blame for declining sales on downloads and peer-to-peer file-sharing networks would appear to make sense. After all, just a few years ago, when downloading was still relegated to a few students in dorm rooms, recorded-music sales were booming. Since 2000, however, sales have been falling while activity on file-sharing networks has exploded — and the RIAA believes that’s no coincidence. Although music-industry lawsuits effectively neutered early file-sharing networks like Napster and Aimster, others — like KaZaA, WinMX, and iMesh — have popped up in whack-a-mole fashion, leading many to believe the genie is already out of the bottle and can no longer be contained. KaZaA, for example, now boasts more than 200 million users, and traffic across all file-sharing sites has reached over three billion music downloads each month.
So it’s not surprising that the record industry sees downloading as the main cause of its ills. In a report issued last August, the RIAA placed the blame for the slump squarely on the shoulders of those who trade ripped files of copyrighted songs. The organization cited a survey, conducted last May by Peter D. Hart Research Associates, it said provided “the strongest evidence to date” that downloading is displacing sales.
In the survey of 860 Internet-connected music consumers between 12 and 54, those who downloaded more and bought fewer CDs outnumbered those who both downloaded and purchased more CDs by two to one. While conceding that things like the overall decline in consumer spending could be playing a role, RIAA president Cary Sherman called downloading “the main culprit” in the drop in sales, adding that “this data should dispel any notion that illegal file sharing helps the music industry.” Sherman also noted the dramatic rise in the number of people who’ve “acquired” burned CDs, although it wasn’t clear whether “acquired” meant “purchased” or “received from a friend.”
The RIAA also said that the total value of music shipments for all formats had fallen from a high of nearly $14.6 billion in 1999 to $12.6 billion in 2002. The number of CDs, cassettes, LPs, and so on shipped from warehouses fell 10.3% in 2001 and 11.2% in 2002. CD sales, by far the largest category in the statistics, dropped 6.4% in 2001 and almost 9% in 2002. These statistics for units shipped jibe with those from Nielsen SoundScan, which tracks actual retail sales. SoundScan reports that CD sales, which made up 94% of music sales in 2002, declined 8.7% that year.
While few dispute the numbers, some, such as George Ziemann, are challenging the RIAA’s inferences from them. Ziemann, an Arizona-based musician and owner of MacWizards, a music production company, was propelled into the debate when he wasn’t able to sell his band’s CDs via online auctions on sites such as eBay, Amazon, and Yahoo because they were burned on recordable CD-Rs. Ziemann says he was told that because CD-Rs are often used to record pirated material, they’re banned on many auction sites as a result of the RIAA’s antipiracy efforts (eBay allows CD-R sales if the seller stipulates he owns the copyright).
As a result of that experience, Ziemann researched the RIAA’s figures and came to very different conclusions, released in a much-circulated article, “The RIAA’s Statistics Don’t Add Up,” posted on his Web site (azoz.com). He makes two key assertions: 1) that the labels raised CD prices during a down economy, and 2) that they slashed the number of new releases by almost 25% during the past three years. He says that these factors, and not downloading, are responsible for sluggish CD sales.
To arrive at the first conclusion, Ziemann took the RIAA’s numbers for the retail value of CDs sold and divided it by the units shipped to determine an average CD price. He found that prices have steadily increased, from an average of $12.05 in 1990 to $14.23 in 2001. Although the numbers for 2002 weren’t available when Ziemann did his analysis, using the same formula we determined that the average CD price reached $14.99 in 2002. But when you exclude the promotionally priced CDs sold through record clubs or nonmusic stores like Starbucks and The Gap, the average price rose from $14.31 in 1998 to $17.09 in 2002.
Ziemann supports his contention that labels are releasing fewer new CD titles by using the RIAA’s market data through 1999 — it inexplicably stopped issuing these numbers in 2000. Combining this with an RIAA press release entitled “The Value of a CD” that said 27,000 new releases hit the market each year, he constructed a graph showing that releases fell 25% over two years, from a high of 38,900 in 1999 to 27,000 in 2001. SoundScan’s numbers show new releases falling from 38,857 in 1999 to 31,734 in 2001, a 20% drop. Although its latest figures show releases increasing to 33,443 in 2002, that is still 14% below 1999’s peak number.
In Ziemann’s assessment, the combination of fewer releases and higher prices — not free downloads — caused sales to slump. His argument is bolstered by Josh Bernoff, an analyst at Forrester Research, who pointed out in a report issued last August that this isn’t the first time booming CD sales have plunged. For instance, during the recession in 1991 — long before anyone even knew what a download was — CD sales growth fell from 15% to 4%. When you consider that the country’s gross domestic product (GDP) declined 36% in 2002 and the S&P 500 dropped an equally depressing 28.78% during the same period, the recent 9% decline in sales doesn’t seem so dramatic — particularly for a format that’s been around for 20 years.
New Kids in Town
The RIAA could be ignoring other factors that are having a negative effect on CD sales. Bernoff argues that growing competition from other forms of entertainment, such as DVD players and videogames, and the consolidation of radio-station ownership are having a much more deleterious effect on sales than downloads. For example, people in the U.S. spent almost $7 billion on video and computer games in 2002, and more than one-third of all U.S. homes now have a DVD player. Given that the price difference between many top-selling CDs and DVDs is just a few dollars, it’s not hard to imagine many people opting for a sexier, newer format that offers not just music, but a movie in multiple formats that can include directors’ cuts, commentaries, and other bonuses.
Perhaps even more significant, the consolidation in radio has resulted in Clear Channel Communications controlling 60% of the rock radio stations in the U.S. That means listeners are exposed to more homogenized playlists, so fewer artists get exposure, and listeners hear a narrower selection of songs. Also, radio promotion — where labels pay promoters to get stations to play certain songs — has become too expensive for all but the major labels. As a result, mainstream radio rarely plays music from emerging artists signed to small or midsize labels. Even MTV plays fewer and fewer music videos. So people are turning to the Internet as the primary medium through which they can discover — and perhaps buy — new music.
Also, consolidation in the music industry, where four of the five major labels are owned by large public corporations, has increased the pressure on music divisions to make “hit” records to meet quarterly earnings expectations. This has resulted in the labels signing fewer bands, paring rosters and staffs, and taking fewer marketing risks. If a new artist’s album doesn’t generate excitement quickly, the label will shift its resources to another project. While many of these artists eventually move to smaller independent labels, these labels tend to lack the money and marketing muscle to generate huge sales numbers and often lack top-shelf distribution and international sales. The result is lower sales for many artists. Consolidation has also contributed to the majors releasing fewer CD titles over the past few years.
Too Little, Too Late?
The RIAA also claims that downloads take money out of musicians’ pockets. But thanks to high-profile suits filed by artists like the Dixie Chicks and Incubus against their labels, fans are becoming aware of record-industry contracts and accounting policies that result in few artists ever making much money from the sale of their music. This might lead to fans feeling less guilty about “stealing” music.
The record industry acknowledges that less than 10% of its artists will “recoup,” or make back, the advances they’re given when they sign a recording contract. In fact, rather than worrying about lost sales, many artists view the Internet as their lifeline to attracting new fans. In a recent opinion piece for the Los Angeles Times, Janis Ian, an outspoken proponent of downloading, said that in the six months she’s been offering free downloads of her songs on her Web site, “Thousands of people have downloaded my music . . . and they’re not trying to steal. They’re just looking for music they can no longer find on the tight playlists of their local radio stations. That’s how new artists gain listeners these days — through the Internet.”
That the labels have been painfully slow to adapt to the Internet and the new ways people want to receive music could also be hurting sales. If they want people to migrate from free downloads to paid services, they have to offer subscription services that can not only compete, but add incremental value. There are plenty of examples — from cable TV to bottled water — of people paying for services or items they can get for free. But the labels still seem mired in control issues, which has resulted in lawsuits, draconian legislative initiatives that trample on people’s fair-use rights, and threats of invasive actions against the very people who buy their product.
All of this chest-beating and bullying by the labels has generated lots of ill will. Until recently, hardly anyone even knew what the RIAA was — today, its Web site is hacked and shut down about once a month. When the labels finally launched online ventures, they completely missed the mark with limited catalogs and restrictive digital rights-management schemes that impeded or prevented the things people want to do most: make CD compilations and transfer music to portable MP3 players. More recent online services such as MusicNet and Pressplay are steps in the right direction, but they have to go farther — with things like more attractive pricing and deeper catalogs — to compete with free services.
For instance, the average price of a download is 99¢ a track, so downloading an 18-track CD song by song comes to about $18. While this is only slightly more than the average price of a CD, you’re getting compressed audio and no packaging, and you have to devote time and effort to downloading the music.
That’s not to say that free downloads and file-sharing networks aren’t having an impact on the music business. In fact, given the usage statistics, it’s surprising they aren’t having a bigger impact. But they’re probably not the sole — or even major — cause of the industry’s woes. The irony is that, like other technological advances bitterly fought by the music industry — from player-piano rolls to the audio cassette — the Internet is probably its salvation. Forrester Research predicts that by 2007, 17% of the industry’s revenues, or $2.1 billion, will come from downloads. Jupiter Research’s projections are even rosier.
Recently, it appeared that the music industry might abandon its confrontational approach in favor of more diplomatic solutions. In a keynote speech in March before the National Association of Recording Merchandisers (NARM), retiring RIAA chairwoman Hilary Rosen said the industry needed to focus on buyers: “It’s time to come together. Now is our opportunity to put [consumers’] interests first.” Among the ways the industry could do this, she said, was to meet the demand for music in multiple formats, offer a deeper catalog, and enable people to make compilations “without feeling guilty or like criminals. Fighting piracy is a waste of time if the customer is not served in the legitimate marketplace.”
Such hope, however, turned out to be short-lived. That same week, the RIAA sent letters to 300 U.S. companies complaining about copyrighted materials on their corporate networks, warning, “These acts of infringement could expose your employees and your company to significant legal damages.” Rosen’s yet-to-be-named successor has a tall order to fill: find a way to stop the RIAA from shooting itself in the foot and get the record labels back in the business of effectively distributing their music.