Causes And Solutions For The Recent Decline In Recorded Music Sales

Wesleyan University The Honors College

Causes and Solutions For

The Recent Decline In Recorded Music Sales

Doug Walters

Class of 2008

A thesis submitted to the

faculty of Wesleyan University

in partial fulfillment of the requirements for the

Degree of Bachelor of Arts

with Departmental Honors from the College of Music

Middletown, Connecticut April, 2008

INTRODUCTION

The music industry is changing dramatically and quickly. As of 2007, digital

audio sales have continuously increased since their advent, while physical singles and

album sales have continuously decreased from their peak in 2000. Falling CD, tape,

and vinyl sales have had a major impact on music retail stores. Tower Records and

Sam Goody—major chain music stores—declared bankruptcy in 2006. Meanwhile,

Apple’s digital store, iTunes, has become the top music retailer in 2008—recently

surpassing Wal-Mart and Best Buy (http://www.cbc.ca/technology/story/2008/

04/04/tech-itunes-numberone.html). Between 2003 and 2006, 2,700 record stores

closed across the US. Between 2000 and 2006, more than 5,000 industry employees

were laid off (Hiatt). Furthermore, it doesn’t seem that the music industry has been

able to offset the financial loss of a decline in physical sales with an increase in

digital sales. Overall album sales, which includes 10 digital singles as equivalent to

an album, has decreased from 785 million in the year 2000 to 585 in 2007—a 25%

decrease.

The Recording Industry Association of America has turned a spotlight on

Internet piracy—or the illegal downloading of free music over the Internet—as an

explanation for the industry’s downturn. Several columnists, bloggers, record

executives, economists, and music critics find this explanation lacking and believe the

industry’s unwillingness—or inability—to adapt to a changing distribution landscape

is the main source of the problem. This paper focuses on how changes in the industry

are affecting three main entities and their interactions. These are labels, consumers,

and artists.

I begin with a modern history of the recording industry focusing on changing

technology over the past forty years and its economic impact. The immergence of

CDs caused a major boom in sales throughout the 1990s, which then declined after

the rise of MP3s. I investigate the extent to which music piracy has affected album

sales, focusing on two competing theories: substitution vs. sampling. This is a highly

contentious field of study, but a meta-analysis of current literature suggests that

piracy is the cause of 0-30% of the decline in album sales (Pollock).

I move on to examine other explanations for declining album sales. First, I

challenge the argument that CD sales are declining because older consumers have

stopped replacing vinyl collections since the year 2000. While this explanation is

frequently mentioned in the press, there is a dearth of evidence for this hypothesis. I

then focus on the decreasing value of CDs caused by competing forms of media, price

fixing, and Digital Rights Management restrictions. Music, however, continues to be

quite popular as concert tickets and digital single sales rise to unprecedented heights.

Finally, I focus on the overarching trend in the music industry: democratization

allowed by the Internet. Independent labels, artists, and consumers are increasingly

dictating the direction of today’s music industry. New technology is reducing the

economic significance of recorded music and changing the relationship between the

entities mentioned above. New effective methods of marketing and distribution are

becoming available to the masses and there is a rising middle-class of musicians

taking a bigger share of both concert tickets and album sales.

Labels have traditionally been brokers between creators and consumers of

recorded music. Their job has conventionally focused on buying new music and

distributing it to consumers. I argue that falling profits from album sales will push

music companies to provide different services to artists and new products to

consumers, reducing the album's importance as the unit of exchange between artists,

labels and consumers. This will change the landscape of the industry, and forge a

new relationship among its participants.

HISTORY 1970-2007

The music industry remained largely unchanged throughout the 1970’s and

1980’s with album sales hovering around 650 million. In the early 1990’s, compact

discs started gaining popularity and in a span of 6 years—1992 to 1998—CD

shipments from the manufacturer doubled from 408 million to 847 million per year

[see note below about sales figures] (Recording Industry Association of America).

CDs were extremely popular because of their convenience and flexibility. Music

listeners could repeat songs, shuffle, skip, etc. all with the easy touch of a button—

much faster and easier than the guess and check of rewinding a cassette or the

delicate finesse of moving a record player arm (Mnookin).

Album sales continued to increase throughout the 1990s until 2000. In some

ways, the increase in sales from CDs popularity may have provided record companies

with a false sense of confidence. It is possible that many purchases were from labels’

back-catalog as consumers replaced LPs and tapes with the new convenient, and

increasingly ubiquitous, CD. This effect is examined in further depth later in this

paper.

At the turn of the millennium, a new form of media began to threaten the

dominance of the CD. The MP3 provided similar improvements over its predecessor

that the CD had compared to tapes and records only a decade before. Furthermore,

while offering infinitely more convenience and flexibility, digital audio media created

whole new possibilities for distribution, sharing, and acquisition.

While record company executives were slow to realize the potential in MP3s,

17-year-old Shawn Fanning was not. Napster was created in 1999 as a peer-to-peer

(P2P) music file-sharing network that turned the Internet into an almost unlimited

cyber-library of free music. At it’s peak, Napster had 70 million users but was only

allowed to exist as a free service for less than two years before it was forced to shut

down due to prosecution from many of the largest entertainment and technology

companies. Napster settled to pay $26 million to various copyright owners and was

eventually purchased by Roxio to be reborn as a paid subscription service in 2003

under the name Napster 2.0. Many other free peer-to-peer (P2P) networks have

sprung up in Napster’s wake, however, including Gnutella, Morpheus, KaZaa,

Aimster, Lymewire, and more recently BitTorrent networks—a new form of P2P—

like OINK, Waffles.fm, and What.cd (Gulla, 222). The Recording Industry

Association of America (RIAA) has filed over 20,000 lawsuits against music fans for

illegal downloading (Hiatt). I will discuss the effects and implications of file-sharing

in the following section of this paper.

In the midst of the music industry’s war on Napster, album sales began to

decline. Album sales have decreased every year since 2000 and the decline was

greatest in 2007. In 2005, overall album sales in the United States (which include 10

digital singles as the equivalent of 1 album) decreased by 4% from the previous year,

in 2006 overall album sales decreased by 1.2%, and in 2007 overall album sales

decreased by a dramatic 9.4%! The chart below displays yearly album sales from

1998 through 2007. The total decline from 2000 to 2007 was 200 albums

representing a 25.5% decrease from the peak of 785 million albums.

A great deal has been written about the music industry’s major mistakes

during this transitional time-period. Suffice to say that it did not embrace the idea of

a new and revolutionary technology. They fought and sued most of the forerunners in

MP3 technology including online music sharing sites and MP3 technology

developers. Their own attempts to integrate MP3s into their distribution models

involved frustrating interoperability problems and consumer alienating restrictions.

They were afraid, maybe justifiably, but they missed several chances at profitable

innovation and are now playing catch-up.

This superficial history of the industry seems to imply that the industry

downturn, which coincided with the advent of illegal downloading, is a direct result

of illegal file-sharing. However, a more in depth examination implies that music

piracy is just one—possibly irrelevant—factor in a long list of problems that the

industry must face if major labels hope to reverse the industry’s recent, dour

trajectory.

An important note about album sales figures in the context of this paper

A frustrating aspect of researching CD sales is that there are many different

methods of analysis. For instance, the RIAA reports on CDs shipped from the

manufacturer—a figure that does not include digital sales and is therefore insufficient

for today’s market. Nielsen Soundscan, the only organization that tracks sales at

retail, has an effective monopoly on the information. I contacted them and was told

that I could pay a student discount rate of $250 for each year that I was interested in

(I’ve been told by someone who works for a major label that a full year’s subscription

costs $500,000). Fortunately, Nielsen Soundscan’s more recent figures from the

years 1998 and later are available online in archived articles. The following chart

presents all sales in the consistent unit of albums—taking 10 digital singles as

equivalent to 1 album.

YEAR

OVERALL

ALBUM

SALES IN

MILLIONS

CHANGE

2007

585

-9.4%

2006

646

-1.2%

2005

654

-4.0%

2004

681

-0.9%

2003

687

-0.9%

2002

693

-9.2%

2001

763

-2.8%

2000

785

4.0%

1999

755

6.2%

1998

711

Source: 1998-2000, http://www.medicalnewsservice.com/

fullstory.cfm?fback=yes&storyID=34

2000-2001, Zahlaway

2002-2003, http://findarticles.com/p/articles/mi_m0EIN/

is_2003_Dec_31/ai_111776584

2004-2005, http://www.infoplease.com/ipea/A0930141.html

2006-2007, Nielsen Soundscan

PIRACY ON THE INTERNET

Peer-to-peer (P2P) networks allow users to share music for free over the

Internet. According to BigChampagne LLC, a company that tracks a variety of

Internet activities, approximately one billion songs per month are shared through P2P

networks (Smith). There are two primary hypotheses regarding how online music

piracy affects overall music sales: sampling vs. substitution. These two competing

theories have opposite conclusions. The sampling theory suggests that P2P users

download songs as a non-committal means of “testing” music prior to purchase.

Advocates of the sampling theory suggest that illegal downloading does not hurt

music sales, but function as free marketing for musicians and might actually increase

sales. The substitution theory argues the opposite—that music downloading

functions as a free substitute for music purchasing and actually decreases music sales

among potential consumers.

The Recording Industry Association of America (RIAA) has come down very

hard on the side of substitution and continues to target college music fans with pre-

litigation settlement letters in attempts to stem downloading. In a single week in

2008, the RIAA sent settlement letters to 407 students at 18 universities throughout

the country (http://www.riaa.com/newsitem.php?news_year_filter=2008&resultpage

=&id=36720A8F-FF55-2886-C2A2-EAB629C662BD). According to their website,

the RIAA targets college students because

“…piracy habits of college students remain especially and disproportionately

problematic... According to some recent surveys, more than half of the

nation’s college students frequently download music and movies illegally

from unlicensed P2P networks. That’s a statistic we just cannot ignore.”

(http://www.riaa.com/faq.php).

While the RIAA seems convinced that sharing music online necessarily means

a loss of money for the industry, economists are slowly lining up on opposing sides of

the substitution vs. sampling argument. Stan Liebowitz is an economics professor at

the University of Texas who has written extensively about copying – ranging from

VCR copying in the 1980s to modern file-sharing. While Liebowitz admits that the

RIAA has a tendency to manipulate figures to present "the picture they wish to

portray about the conditions of the industry," his own research suggests that file-

sharing is in fact primarily to blame for the loss in sales beginning in 2000

(Liebowitz, 2006). Furthermore, he argues that the brief spike in sales between 2003-

2004 was a result of decreased downloading due to the first file-sharing prosecution

cases.

On the other side of the fence, Felix Oberholzer-Gee of Harvard University

and Koleman Strumpf of the University of Kansas have garnered a huge amount of

publicity for their studies arguing that “downloads have an effect on sales which is

statistically indistinguishable from zero” (Strumpf, p. 2). This study was the first

study on the effect of file-sharing on music sales that has been published in a major

peer-reviewed journal—The Journal of Political Economy (Pollock). There was a

three-year lag between publication on the Internet and publication in a peer-review

journal, though, so maybe other studies are on currently going through peer-review.

Their study is appealing because it directly observes file-sharing and does not

rely on theory, surveys, or comparing CD purchasing patterns of people who

download versus people who don’t—essentially a moot point that can only show

correlation and not causality. If I do not have the money to buy CDs and I download

several albums, this does not suggest that I am downloading instead of purchasing.

Oberholzer and Strumpf examine aggregate sales and downloads for a wide range of

releases. They argue that illegal downloading is appealing to individuals who are

time-rich but cash-poor—a likely explanation for why downloading may be so

popular on college campuses. These individuals, argue Oberholzer and Strumpf,

would purchase few CDs even in the absence of P2P networks (p. 7).

This finding was supported by a 2006 study based on over two thousand

Canadian survey respondents. This study found no direct relationship between P2P

file-sharing and CD purchases. The analysts from this study reported that it was

difficult to conclude what the net effect of P2P file-sharing was on digital purchases.

Rufus Pollock published a meta-analysis of various studies published between

2000-2006. He concludes that, given the variety of data, file-sharing is potentially

responsible for 0-30% of the decline in music sales. This means, according to

Pollock’s analysis of the literature, that if music sales have declined from 785 million

to 585 million between 2000 to 2008, file-sharing is potentially responsible for a

decline of 0-60 million albums. Additionally, several studies suggest that if file-

sharing does decrease purchasing, more-popular artists are hurt more than less-

popular artists.

The study of down-loading’s effects on album sales is quite new and deserves

much more attention. It is important to remember that not all downloads necessarily

represent the loss of a sale—a frequent mistake made by the RIAA and others.

Oberholzer and Strumpf’s 2005 revision of their study, which maintains that file-

sharing is a statistically insignificant factor in album sales, is the most sophisticated

current research on the issue (Pollock).

It seems most likely that there is both substitution and sampling going on.

Music consumers have more information and choice than ever before. The industry

used to rely largely on radio and print to market music. They largely had control over

what consumers could be exposed to and what releases were easily purchased. Now,

consumers can read blogs, listen to customized Internet and digital radio, email songs

to friends, download music they have read about, share music on Internet social

networks, etc. I argue that these factors function to increase musical fanaticism and

demand. However, a free and convenient alternative to purchasing music can be

hugely tempting to consumers who can legitimately expect to fill a 160 gigabyte iPod.

Artist reactions to file-sharing are mixed. After the 2005 Supreme Court

lawsuit that paved the way for recording companies to sue file-sharing companies for

to The Dixie Chicks hailed the court’s decision as a major victory for artists. Other

artists, with less expansive fan-bases, found the decision a disappointment. Jeff

Tweedy, front-man for the band Wilco, believed that "Any decision that outlaws or

discourages developing technology that expands Wilco's reach is shortsighted"

(http://www.smh.com.au/news/ technology/mixed-reaction-from-

musicians/2005/06/28/1119724613388.html).

Tim O’Reilly—president and founder of a computer book publisher —has

expressed an interesting opinion about Internet book piracy that is very applicable to

music: “For all of these creative artists, most laboring in obscurity, being well-

enough known to be pirated would be a crowning achievement. Piracy is a kind of

progressive taxation, which may shave a few percentage pointes off the sales of well-

known artists (and I say ‘may’ because even that point is not proven), in exchange for

massive benefits.” (Snyder, John and Ben).

It is also possible that file-sharing could positively effect other facets of the

music industry. One study by Julie Morimer and Alan Sorrinsen concludes that “the

patterns in the data suggest that while file-sharing may have eroded profits from CD

sales, it also increased the profitability of live performances.” (Pollock). This is

especially significant as most musicians today make more money from performances

than they do from album sales. Moreover, labels are increasingly looking to concert

revenues as a source of profits to replace album sales.

In the end, it almost doesn’t matter whether or not piracy is to blame for

decreasing album sales. The RIAA is doing what it can to frighten and anger music

fans. It is partially effective, but downloading is still very popular and fans are

finding ways to get around being tracked. For instance, it is legal to download files

from the Internet, but illegal to upload them for others to download. A file-sharer can

play it safe and hope for other users to take risks and make music available—a user

can “leech” as long as they don’t “broadcast”. There are apparently many people

willing to take risks to maintain file-sharing communities. In 2007, when the

authorities shutdown major downloading site, OINK.fm, Waffles.fm sprung up in its

wake almost immediately with more new member requests than the server could

handle (Fisher, http://arstechnica.com/news.ars/ post/20071105-oinks-new-piglets-

proof-positive-that-big-contents-efforts-often-backfire.html). Piracy may be reduced,

but it will not cease to be an issue in the near future despite the RIAA’s efforts.

Many avid music fans used OINK because it was simply the fastest, vastest, and most

user-friendly Internet library available.

Labels must out-compete free services. They are frustratingly encumbered by

an unwillingness to sacrifice short-term profits for a better long-term model. They

must provide a service that is faster, easier, and more complete than any free

alternative. Public libraries do not make Bookstores irrelevant. Network TV does not

make Satellite TV less appealing. People pay for high-speed Internet even though

free dial-up alternatives exist. These are the models that the music industry should

examine for distribution techniques.

REPLACEMENT FACTOR OF CDS IN THE 1990s

Many articles written about current declining music sales blame the end of the

CD replacement factor that helped boost sales in the 1990s. The theory is that CD

sales boomed in the 90s in part because consumers were replacing their vinyl and tape

collections with CDs. Several writers point to a decline in this replacing factor of

older recordings for decreasing album sales following the year 2000, but fail to

provide support.

One study by Hong from 2004 attempts to show evidence that “transition from

LPs to CDs might describe the increase in music sales during the 1990’s as well as

the recent slowdown.” Hong examined buying patterns of consumers from different

age groups during the mid to late 1990’s and found that older consumer’s purchases

increased in the mid 1990’s, but decreased in the late 1990’s—before Napster would

have been a factor, he argues. If one assumes that decreasing music purchases from

consumers aged 48-67 are completely a result of a fading replacement factor, Hong’s

conclusions suggest that this is responsible for 44.7% of the decline in total music

sales from 1999-2000. It is a very dubious assumption, though, that all music

purchases for that age-range are based on replacing vinyl and tapes with CDs. Hong

admits that “in order to quantify this effect precisely, more work needs to be done in

this direction.” (http://siepr.stanford.edu/Papers/pdf/03-18.pdf)

My personal research regarding this hypothesis does not support this theory.

Nielsen Soundscan does not report on overall catalog sales (as in, old releases) from

before 2004, but for the years 2004-2007, deep-catalog sales have increased from

about 25% of total sales to 28% of total sales. I also traced sales of The Beatles’

classic album, Abbey Road, from 1995 to 2007. Sales increased every year (Nielson

Soundscan). This is not conclusive evidence that the replacement factor is irrelevant,

but it does not offer support if older albums are selling better today than a few years

ago.

DECREASING VALUE OF CDs

Another possible contributing factor in the decrease of album sales may come

from a decline in the perceived value of CDs that has not been accompanied by a

decrease in cost. In 2000, 42 states and three territories filed a federal anti-trust case

against the major labels for artificially fixing CD prices as higher than their market

value would dictate. The big five major label companies from 2000—which are now

four since Sony merged with BMI—settled to pay $67,375,000 in cash and provide

$75,500,000 worth of free CDs to charitable organizations, libraries, schools, etc. as

consumer compensation (Fisher, http://arstechnica.com/mews.ars/post/20020930-

1254.html).

This trial occurred the same year that album sales reached their peak and

began to decline. Another factor, besides price fixing, that has contributed to CDs’

weakening value is the rise of alternate forms of media and electronics such as DVDs,

video games, cell phones, etc. With the exception of 2007, DVD sales have been

increasing every year since their inception (Snider). The video game industry has

been on the rise since 1992 (Liebowitz, 2005). Between 1999 and 2003, DVD sales

rose over $5 billion and video game sales rose $3 billion—a 40% increase for video

games (Oberholzer-Gee and Strumpf, p. 37). Furthermore, there are several other

new technological innovations that are potential competitors for consumer dollars

including new subscription television and radio services, computers, cellular phones,

and—slightly ironically—the MP3 player.

Liebowitz, however, argues that DVDs cannot be blamed for the decline in

music sales. He argues that one must include all forms of video and movie revenues

if they are to be considered a substitute for money spent on music. Movie rentals

declined slightly in 2000 and therefore offset the spike in DVD sales for total video

and movie revenue, according to Liebowitz. Because 2000 was the turning point in

music sales, Liebowitz believes that DVDs cannot be a major contributing factor in

the downturn.

Liebowitz’ argument shows that DVD and videogame sales/rentals may not be

the only reason for decreasing album sales. However, the increasing sales of DVDs

over the years when music sales have decreased is a likely and legitimate contributor.

I think it is inappropriate to compare movie rentals to music purchase. It is better to

compare DVD purchase to CD purchase. In this comparison, there are further

reasons why DVDs might replace CD sales. DVDs come with more than just a

movie. They often include bonus materials that presumably increase their value. The

stakes are being raised as technology improves. I would argue that there is increasing

pressure for albums to be accompanied with bonus materials—videos, ringtones,

posters, making-of footage, etc.—to make music purchases more valuable.

Furthermore, record companies’ efforts to keep music fans from sharing their

legitimate purchases have caused several technical complications. As Ben and Dan

Snyder put it in their 2003 report, “When a DVD costs $19.99 and includes the movie

in multiple formats with bonus materials and no hassle, and a CD costs $18.99 and

comes with potential legal hassles, limits on fair use, and all the finger waving the

RIAA can muster, the choice of which product to buy becomes clear.”

DIGITAL RIGHTS MANAGEMENT AND THE BIG FOUR

Four companies own the distribution rights for over 70% of the world’s music

(Jobs). When these four giants decided that they must sell downloadable, digital

music via the Internet, they also agreed that there must also be some means for

keeping those files from being pirated. The solution was to imbed each MP3 with a

restrictive “lock” that keeps consumers from sharing the files between computers.

This “lock” is called Digital Rights Management or DRM. Until very recently, all

major label digital music downloads were required to have some form of DRM.

Labels also tried embedding CDs with DRM. This caused many problems. In

2002, several labels under the majors’ umbrella like BMG, RCA, and Arista

imbedded their audio CDs with DRM. These DRM CDs would not play in some CD-

players or computers. This understandably caused outrage among consumers. In

2005, Sony BMG launched its own form of audio CD DRM that loaded software on

to the purchaser’s computer secretly and without consent. This software caused

security weaknesses and left computers open to viruses. Consumer outcry caused

Sony BMG to recall millions of CDs and provide a software remedy.

After these debacles, major labels stopped using DRM on audio CDs. CDs

can easily be imported DRM-free into any computer (and subsequently shared).

However, major label DRM MP3s downloaded from the Internet continue to cause

significant problems for consumers. First, there is a lack of interoperability between

distributors and MP3 players. MP3s bought from Apple’s online store, iTunes, can

only be played on Apple’s iPod; MP3s bought on Microsoft’s Zune can only be

played on Microsofts Zune player; and MP3s from Sony’s Connect store can only be

played on Sony’s player.

A further example of the bizarre climate created by DRM comes from a Wired

Magazine article by Frank Rose (note: the following confusion is not due to typos),

“As a member of the Consumer Electronics Association, Sony joined the

chorus of support for Napster against the legal onslaught from Sony and other

music giants seeking to shut it down. As a member of the RIAA, Sony railed

against companies like Sony that manufacture CD burners. And it isn’t just

through trade associations that Sony is acting out its schizophrenia. Sony

shipped a Celine Dion CD with a copy-protection mechanism that kept it from

being played on Sony PCs. Sony even joined the music industry’s suit against

Launch Media, and Internet radio service that was part-owned by […] Sony.

Two other labels have since resolved their differences with Launch, but Sony

Music continues the fight, even though Sony Electronics has been one of

Launch’s biggest advertisers and Launch is now a part of Yahoo!, with which

Sony formed a Major online partnership.” (Snyder)

As the chaos over DRM continues, consumers are starting to react negatively.

A 2007 survey of over 1700 respondents from a broad sampling across the UK,

indicates consumer awareness and dislike for DRM is on the rise. In 2006, 53% of

respondents had not heard of DRM but by 2007 only 37% had not heard of it. This

demonstrates an increase in at least some awareness of DRM by 16%. 68% of those

who expressed an opinion on DRM said the only music worth purchasing was DRM

free. Significantly, 63% of those with an opinion also agreed that DRM was a good

idea because it “protects copyrighted music from illegal file-sharers”. This suggests a

willingness to purchase music, but a simultaneous disdain for the cumbersome

problems associated with DRM (Entertainment Media Research in association with

OLSWANG).

Retailers have also expressed dislike for DRM. The British Entertainment

Retailers Association (ERA)—associated participants in the survey study mentioned

above—have called for an end to DRM. Speaking on behalf of UK music retailers,

copy protection mechanisms are “stifling growth and working against the consumer”

(Paul).

In a marketplace where Apple sold 72% of all portable music players in 2007,

it is essential for any online music retailer to sell MP3s compatible with Apple’s iPod

(Burg). eMusic founder Nate Anderson realized this and turned his subscription-

based online music service into the second top digital retailer behind iTunes. Most

impressively, he did it all without any major label content. Eschewing 70% of the

world’s music, Schonfeld used independent labels, a convenient subscription model,

and DRM-free content for great success.

Even Steve Jobs, owner of the Apple Corporation, has called for an end to

DRM. Apple has famously refused to license their form of DRM known as Fairplay

to other companies. In an open letter that Jobs wrote regarding music and DRM, he

claims that this was not to keep competitors from selling music to be played on the

popular iPod, but rather because of the importance of keeping the Fairplay DRM

technology form leaking—a situation which could potentially cause iTunes to lose

their major label contracts. However, Jobs goes on to say that if labels were willing

to go DRM-free, “Apple [would] embrace this wholeheartedly” (Jobs). Jobs

compellingly points out that 90% of the labels’ sales still come from CDs that are

now released DRM-free, making DRM precautions online mostly a cumbersome

limitation on what could be a burgeoning and innovative retail solution for labels.

Someone at the Majors must have been listening. On January 10, 2008, the

enormous online retail store, Amazon.com, completed its major label roster and will

sell DRM-free downloads from over 12,000 labels including the four majors. This

represents a massive step in online music distribution. Large retail chains have

shown great success recently in CD sales—Walmart and Best Buy held the top two

spots in the market share in 2007 (www.itfacets.biz/index.php?id=P8622). I predict

that Amazon will only be the first step in the destruction of DRM and the creation of

more consumer-friendly distribution models.

Consumers expect interoperability for their music purchases. They expect to

be able to download a song, email it to their friend, put it on their iPod, Zune, cell-

phone and, burn it to a disc. Labels would presumably prefer to make a consumer

pay for each step along this path, but as long as labels fight consumer expectations,

they are driving potential customers away. If consumers can’t get what they want

through legitimate music purchase, they will be pushed to free music downloading or

other forms of entertainment. Older consumers especially may simply be discouraged

from music acquisition entirely; where would they turn if online purchase is

confusing and traditional music retailers are vanishing? DRM is not the answer to

Internet piracy. It is especially ridiculous given that a Forrester Research survey 59%

of digital audio files come are imported from CDs . DRM was a failed experiment

and should be removed from all music files.

DIGITAL SINGLES EFFECT

Overall album sales figures were quite grim in 2007. These numbers include

10 digital singles as equivalent to a digital album. However, total sales, which

include the total number of singles, CDs, digital albums, vinyl, and music videos as

equivalent units—increased 14% in 2007 to a record-breaking 1.37 billion. In 2006,

total sales rose 16%. Digital singles represent a massive chunk of total sales—

increasing 65% between 2005 and 2006, and 45% between 2006 and 2007. Digital

singles made up almost 62% of all units sold in 2007.

This huge rise in units sold implies that consumers are still willing to

exchange money for music products. However, the fact that consumers are now able

to purchase just the single tracks of their choosing, instead of full albums, means that

consumers can satisfy demand while spending less money. In other words, the rise of

digital singles is simply failing to offset the declining sales of overall albums—whose

measurement includes sales of digital singles.

The industry’s prior model before the Internet allowed for very profitable

bundling. If a music fan wanted three songs from an album, they probably had to

purchase the whole album. Now, consumers can simply purchase those three songs

for $0.99 each. This will increasingly become a problem as Internet music sales

continue to rise. Labels should look for bundling opportunities wherever available.

They must try creative new ideas for encouraging customers to purchase whole

albums instead of singles or to buy multiple products simultaneously.

LIVE MUSIC

Between 1990 and 1998, concert ticket sales hovered around $1 billion per

year. Interestingly, as CD sales began to top-off and decline, ticket sales began to

increase. In fact, industry wide ticket sales have shown record high numbers for the

last 9 years consecutively!

This suggests several trends at once. First, the decrease in CD sales does not

imply a decreasing interest in music generally. Consumers are shifting their music

spending from recordings to performances. This also means a shift in revenue

sources for artists. Seven years ago, around the time when the recording industry

began its decline, musicians derived two-thirds of their profit from recorded music

and one-third from concerts, merchandise, and endorsements. Now, the opposite is

true (www.economist.com/business/ PrinterFriendly.cfm?story_id=9443082).

For artists, this transition may be perfectly acceptable. Booking agents and

tour managers don’t take as large a percentage of ticket sales as labels do from

recorded music sales—85% or greater. This also implies an increased incentive for

artists to give away their music for free essentially as a promotional item for their

more profitable live show.

This shift does not serve labels well because they rely on sales of recorded

music for profit. To counter this, labels are introducing new contracts that include

clauses allowing them to take a percentage of all revenue sources for musicians.

These new contracts, often known as 360-degree contracts, are discussed in more

detail in the following section.

Year

Industry Total

Ticket Sales in

Billions US

Dollars

% Change

Total

Ticket

Sales

Top 100

Tours

Grosses

% Change

Top 100

Tours

1990

1.1

1991

0.83

-24.5%

1992

20.5%

1993

0.9

-10.0%

1994

1.4

55.6%

1995

0.95

-32.1%

1996

1.05

10.5%

1997

1.3

23.8%

1998

1.3

0.0%

1999

1.5

15.4%

2000

1.7

13.3%

1.5

2001

1.75

2.9%

1.51

0.7%

2002

2.1

20.0%

1.63

7.9%

2003

2.5

19.0%

1.95

19.6%

2004

2.8

12.0%

1.97

1.0%

2005

3.1

10.7%

2.07

5.1%

2006

3.6

16.1%

2.37

14.5%

2007

3.9

8.3%

2.28

-3.8%

Source: Pollstar

A final interesting note about concert sales is that, similar to album sales, top

grossing performers are making up less of the concert industry’s total sales then in

previous years. In 2007, for instance, the overall industry sales in dollars increased 8

percent from 2006. However, ticket sales from the top one hundred tours, expressed

in dollars, decreased about 4% from 2006, and the top twenty touring artists’ sales

decreased by 15%. Granted, the Rolling Stones don’t tour every year. Ticket sales

will vary based on which big name artists are touring in any given year. However,

the trend seems to hold true starting from 2000—as far back as my data goes—that

overall ticket sales are rising faster than the top one hundred tours (Pollstar). This

trend is very much in accord with a general democratization of the music industry

spawned largely by the Internet.

MAJORS, INDEPENDENTS AND ARTISTS: NEW METHODS OF

DISTRIBUTION, MARKETING, AND CONSUMPTION

Major labels are losing control of the music industry. New digital recording

technology has made it possible to make very high quality recordings at exceptionally

low cost. Furthermore, the Internet has created incredible new methods of

distribution and marketing for little or no money. This has created massive

possibilities for smaller independent labels with business models that do not require

artists to sell gold or platinum records to turn a profit. Furthermore, there are several

examples of artists both new and well-established turning away from labels entirely

and simply producing, marketing, and distributing their music without labels.

In 2007, independent labels claimed an unprecedented 4 spots in Billboard’s

weekly top-10 selling artists—Arcade Fire and Spoon (both on Merge Records), The

Shins (on Sub Pop), and Bright Eyes (on Saddle Creek) (http://www.locced

down.com/ 2007/12/29/flagging-disc-sales-tour-business-send-industry/). This

demonstrates a dramatic change in the dynamic of the music industry. Granted,

Merge and Sub Pop are big indies, but until 2007 Sub Pop had never had an artist

higher than No. 79. Arcade Fire’s 2007 release was the fastest selling album in

Merge Record’s history (Spotts).

Indie label sales are also declining with major labels, but not as fast. One

analysis of this fact suggests consumer efficacy allowed by the Internet. The founder

of an Indie label based out of Tampa Florida described this trend by saying that “fans

are dictating” (Leeds, http://www.iht.com/articles/2005/12/28/features/record.php).

The increasing popularity of indie focused blogs and music review websites like

Pitchfork, Hype Machine, and Stereogum support the argument that fans may be

turning to Indie artists for “Individualism and Integrity”

(http://www.locceddown.com/2007/12/29/flagging-disc-sales-tour-business-send-

industry/).

If anyone in the music industry is benefiting from file-sharing and free

sampling, it is certainly indie artists who do not receive frequent radio airplay. The

Internet allows bands that might never be heard otherwise a serious shot at success.

Clap Your Hands Say Yeah! (CYHSY) is a striking example. CYHSY sold 200,000

copies of their debut LP without any label support. Sean Greenhalgh, the band’s

drummer, explained that “the question we asked record companies was essentially,

“what can you do for us that we can’t do for ourselves?”

(http://www.cbsnews.com/stories/2007/05/28/eveningnews/main2858961.shtml).

Another shining example is the sixteen-year-old rapper from Atlanta who goes

by the moniker Soulja Boy Tellem. Soulja Boy used the Internet to catapult himself

from anonymity to having a number one single in about a year. His dance sensation

“Crank That (Soulja Boy)” came with a media onslaught set off from his home PC—a

hugely popular instructional dance video on YouTube.com, massive play count on

MySpace, and clever marketing and distribution tricks. Using popular P2P file

sharing sites, Soulja Boy “took whatever the number one song was, say it was 50

Cent ‘In Da Club.’ I’d rename ‘Crank That’ to that and send it out, and everybody

would download it for free. But when they’d get it, it’d be my song. Then the

Google searches and MySpace searches came through wondering who I was.” 10

million MySpace views later, Soulja Boy brokered a contract with Interscope Records

for his debut release.

Not only unknown acts are using non-traditional distribution and marketing

techniques. Several well-established and hugely famous artists are trying out new

methods for getting their music to fans. Radiohead, one of the most widely respected

and well reviewed rock bands of the 1990’s and 2000’s, recently made huge press by

allowing their label contract to expire and releasing their new album for download on

their own website for whatever price consumers chose to pay. Months later,

Radiohead released the album through normal distribution channels with the label XL

and took the top spot in Billboard’s sales charts. There is some discrepancy regarding

how well Radiohead’s online experiment worked. Comscore, an Internet survey

company, reported that 60% of downloaders chose to pay nothing for the Radiohead

album. Radiohead, however, claim that statistic is “totally inaccurate” and

“speculative”, but have not released their own calculations (Sponder).

Following Radiohead’s experiment, several other massive acts announced that

they too were going to try non-traditional release methods. Oasis, The Charlatans,

and Nine Inch Nails all have announced plans for releasing their music online,

without labels, or even for free. Madonna, one of the industry’s highest selling

artists, has left her label, Warner, for an innovative deal offered by the concert-

promotion company, Live Nation. Traditionally, a big act like Madonna would

record and release an album with a label, and then make a separate deal for touring

with a company like Live Nation. Instead, Madonna will use Live Nation for all

recording, production, distribution, marketing, and touring funds. Several other big

acts have followed suit including rapper Jay-Z and the mega-band U2 (Sabbagh).

One last example of the new possibilities for artists is Paul McCartney’s deal with

Starbucks’ new label called Hear Music. The CD is available in traditional music

markets, but also internationally in Starbucks coffee stores.

Increasingly, highly functional methods of music production, marketing, and

distribution are spreading to companies and individuals who previously did not have

the expertise or financial power to compete with major labels. Almost anyone can

release recordings through iTunes, Amazon.com, or MySpace. As lndependent label-

owner Peter Rojas explains,

“It’s the Britney Spearses of the world that are hit hardest by all of this

change. Manufactured pop doesn’t do quite so well when consumers have

better options to choose from. The majors thrived in an era of artificial

scarcity when they were able to control the production and distribution of

music. Today, we have an infinite number of choices available to us, and

when content is infinitely abundant, the only scarce commodities are

convenience, taste, and trust. The music companies that are successfully

shaping the Internet era are recognizing that the real value is in making it

easier to buy music than to steal it, helping consumers find other people who

share their music tastes, and serving as a trusted source for discovering new

music.” (http://www.cbsnews.com/stories/2007/05/28/

eveningnews/main2858961.shtml)

It is increasingly clear that in order to survive, major labels will have to follow

Rojas’ suggestions and focus on providing on providing superior products—which

does not necessarily mean the best music in today’s iPod, MySpace, YouTube, cyber-

reality—that are extremely convenient to purchase.

I do not mean to overstate the extent to which music listening habits have

changed. A Forrester Research survey found that listeners still devote approximately

half of their listening time to traditional radio. Digital audio, which in this study

includes MP3s, Internet radio, and podcasts make up 30% of consumers’ listening

time. Furthermore, 59% of digital audio files were imported from listeners’ personal

CD collection or from CDs borrowed from others. This data shows that the transition

to digital audio is not yet complete, but James McQuivey—author of this Forrester

Research study—projects that half of all music sold in the US will be digital by the

year 2011 (pp. 7-9).

If consumers are purchasing music off of the Internet, it logically follows that

they will also look online for music discovery. Because of the publishing equity

provided by the Internet, this further suggests a loosening of control for major labels.

A New York University study published in 2007 suggests that Blog chatter—frequent

positive mention of a band on many blogs—has a strong positive correlation with

album sales. “When legitimate blog posts exceeded a threshold of 40 before an

album's release, sales were three times higher than for albums that did not generate

this kind of buzz. When blog activity reached more than 250 posts, sales were six

times higher. The number of an artist’s MySpace friends—social network users who

have agreed to be “friends” with a band on MySpace—“also contributed to higher

future sales, but had a weaker correlation as compared to blog chatter” (Chang and

Dhar). This study also found that traditional factors, such as reviews in Rolling

Stone, are still relevant but this is the first hard evidence of the sales impact of user-

generated reviews. Furthermore, the study found that average consumer ratings on

sales websites like Amazon.com, are better predictors of sales than reviews from

mainstream publications.

One way that major labels can still throw their weight around, however, is

through huge media onslaughts combining movies, music, and television. These

multi-angle media blitzes can result in enormous album sales. For Instance, the High

School Musical soundtrack was the highest selling album of 2006; cleverly using

Disney Channel’s television superstar, Hannah Montana, in a blockbuster movie to

create a number one soundtrack album. It appears that increasing consumer efficacy,

decreasing cost of distribution, and reducing exclusivity of mass marketing tools are

making it difficult for major labels to successfully push their music above the din.

They must increasingly rely on bigger and more ubiquitous media synergy to generate

the big sales that have traditionally been part of their business model.

Major labels’ business models have consistently relied on huge selling acts to

subsidize the 90% of bands and artists that do not recoup from production and

marketing costs. Record companies typically release over 30,000 albums per year,

and most of these releases sell under 1000 copies (Timmer). There is a huge reliance

on albums that top the charts. Unfortunately, these higher selling albums no longer

have the same staying power that they once had.

“Consumer fickleness has become evident on the Billboard charts, where the

old blockbuster album appears to be a dying breed. More titles have come and

gone from the No. 1 place on the magazine’s national album sales chart [in

2006] than in any other year since the industry began computerized tracking

of sales in 1991. Analysts say that reflects the lackluster staying power even

among songs in demand.” (Leeds,

http://www.nytimes.com/2006/12/11/business/media/11music.html?pagewant

ed=2&ei=5089&en=c30d615e4991bd1d&ex=1323493200&partner=rssyahoo

&emc=rss).

This “chart churn” shows that consumers seem to have a shorter attention span

for new music. This makes perfect sense given the incredible ease of music

discovery today. An interesting caveat to the “chart churn” problem is that there are

two kinds of releases that are less susceptible: releases which debut very high in the

charts, and female artists. Anticipation for a release seems to increase staying power.

This trend implies that major labels should push acts that are expected to sell very

well, but for newer releases with less hype, it may be safer to consider indie labels’

model, which can profit on lower sales figures.

A new Record Label started in the UK uses a business model that shows this

decreased expenditures idea is already catching on. For this label, “Unlike traditional

recording contracts signed by the top labels, artists will not get big advance payments

but will enjoy a much greater share of revenues.” (http://www.wealth-

bulletin.com/article_detail.php/2666/ex_citi_private_) Major labels can also save

money through cutting down on lavish spending methods that are becoming

unnecessary due to new technology. Terra-Firma, the private equity company that

purchased major label EMI, proposed a plan in 2007 to cut spending on several

fronts. This plan took “$58 million from its A&R and marketing budget. The

savings would come from requiring talent scouts to rely more heavily on sites such as

MySpace to find talent.” (Sandoval, http://www.webware.com/8301-1_109-9818988-

2.html).

If a label is very confident in an artist, however, they may be interested in

increasing their commitment rather than looking for less expensive marketing tools.

For instance, there is an emerging trend among major labels to give artists what are

known as 360-degree contracts (also known as a multiple-rights contract or all-rights

contracts) (www.economist.com/business/PrinterFriendly.cfm?story_id=9443082).

These contracts give labels a slice of profits generated from touring, merchandise, and

endorsements, etc. Ten years ago this would have been a preposterous idea, but it is

currently becoming an important option for big labels. Contracts of this nature raise

skepticism among artists and managers. Not all artists would be willing to sacrifice

even more power and profit to their labels in an industry famous for exploitation. In

the inimitable words of Hunter S. Thompson, “The music business is a cruel and

shallow money trench, a long plastic hallway where thieves and pimps run free, and

good men die like dogs. There's also a negative side.” (http://www.

brainyquote.com/quotes/authors/h/hunter_s_thompson.html)

Some artists, however, like the female-fronted pop-punk band Paramore, have

been quite happy with their 360 degree contract. This type of deal can take the

pressure off artists to produce mega-hits and can provide more tour-support and time

to build a fan-base. Craig Kallman, chairman of Atlantic Records that signed

Paramore to a 360 degree deal, argues that, “If we weren’t so mono-focused on the

selling of recorded music, we could actually take a really holistic approach to the

development of an artist brand.” Artist as brand strongly sums up the 360 degree

concept as Paramore sells everything from flip-flops to tube-tops. The main goal is to

create fans that are dedicated and long-term who will buy merchandise and attend

every concert they can. This will ideally generate a greater profit for a longer time-

period than an artist who sells “1.5 million albums off one single, and here comes

your clothing line, and here comes you personalized phone,” without a truly dedicated

fan-base who would buy that merchandise. Increasing the amount of 360-degree

contracts would probably mean devoting more resources and risk to smaller rosters of

artists (Leeds, http://www.nytimes.com/2007/11/11/arts/music/

11leed.html?_r=2&oref=slogin&oref=slogin).

There are several new options for labels ranging from greater investment and

involvement which only major labels or massive concert promoters could pull off, to

the increasingly appealing independent model that involves relying more on the

power of the Internet. The decreasing power of major labels is affecting different

sectors of the music industry in different ways. In an industry that has always had low

rates of success for artists, the new methods of marketing and distribution must seem

like a godsend to unsigned acts and small labels. Major label artists no longer have

such an extreme advantage from major labels’ publicity machine. It is more difficult

to make a hit song or album truly successful by major label standards in an

oversaturated market.

SOLUTIONS

Having examined several of the major problems affecting the recording

industry, I will now focus on the various solutions available to labels and artists, some

of which were mentioned above. As for the consumer, conditions will only improve

in the future. Music is such fundamental part of human existence that artists will

continue to make great recordings and performances for consumers to enjoy, even if

album sales continue to decline. Technology will continue to put music into the

hands and hard drives of listeners around the world in ever faster and more

convenient ways. That being said, though, there are certainly benefits for artists and

consumers—not to mention label employees—if labels can afford to pay for studio-

time, tours, promotion, album art, etc. Let’s focus directly on the pros and cons of

various possible solutions for labels to overcome declining album sales.

Encourage discovery, sharing, and acquisition

The greatest contribution that the Internet has provided to the music industry

is vastly increased ease of music discovery, sharing, and acquisition for consumers.

Labels have traditionally viewed this as a plague rather than a blessing. However, it

may be a better business model to encourage and utilize increasing methods of

matching consumer preferences to products provided by the Internet. Music has

always been a major aspect of our cultural identities. Music fans love sharing music

with their friends. Young people especially relate over music and make bonds

through fandom. Consumers even purchase t-shirts and bumper stickers to support

the artists they love and to advertise their own music preferences and cultural values

to the world.

Instead of discouraging sharing with digital rights management, labels should

encourage limited sharing. For instance, iTunes could include in each purchase of a

full album the option to send one free single from that album to a friend with the

option of a discounted purchase. Other possibilities include offering a discounted

album with the purchase of two other albums. Literature about music purchases

consistently suggests that consumers have certain set budgets for music and

recreation. Offering free or discounted options with legitimate purchases will make

recorded music seem like a bargain. I don’t believe that there are a certain amount of

albums that a consumer will acquire each year and that the industry must figure out

how to make sure they get the appropriate amount of money for those acquisitions.

An individual’s music acquisition is very much in flux. Interest generates interest.

Increased exposure, sharing, and cheap options for consumers will create more profits

than if every consumer paid the correct amount for the music they have. Paid

services must out-compete free alternatives.

Labels and artists should look for new and creative ways to increase the

availability of music purchases and merchandise. Even if listeners can stream music

off the Internet, actual possession of digital music is vital for MP3 players, which will

increasingly be fundamental to consumers’ experience of music in headphones,

through home audio systems, and in cars. I strongly encourage MP3 player

manufacturers to continue looking for ways to provide portable wi-fi music stores in

MP3 players—similar to ring tone technology in cell phones. Online social

networking is another great arena for increased legitimate music acquisition. The

website Last.fm offers consumers a music-based online community of taste swapping

and free music discovery. Once a consumer decides that they want to make an artists’

music part of their personal collection, they will need to acquire the digital files for

their MP3 players. Maybe they want to purchase t-shirts or posters. All these

products should be made quickly and immediately available on music community

websites.

Death to DRM

The above ideas for increasing music sharing and acquisition obviously

include the end to Digital Rights Management. Sharing is a fundamental part of

today’s music experience. I expect that it’s safe to assume that the reader can when a

friend or relative gave you a free burned CD or emailed you an album, and you in

turn purchased that artists next several following releases, attended their concerts, etc.

Don’t fight small scale sharing; don’t complicate music purchasing; don’t disallow

interoperability. All those things will only frustrate and discourage consumers.

Piracy: friend or foe

Current literature suggests that piracy is responsible for between 0-30% of the

decline in album sales from the year 2000. However, there is simply not enough

research on this issue to make any definitive claims. It is a very a counter-intuitive

notion that illegal downloading is not hurting album sales. However, these issues are

obviously more complex in reality than in my non-economist’s projections.

Whatever the case, the RIAA is making some very dedicated enemies with

their prosecution tactics. Examine www.boycott-riaa.com for a good example. It

doesn’t seem like a good business plan for an ailing industry to pursue tactics that

keep active fans and potential consumers from purchasing music based solely on

principle. Fear of prosecution certainly discourages some potential down-loaders and

it also probably keeps the Internet from becoming a complete free-for-all, but

resentment is also discouraging some potential purchasers. I suggest finding some

more fan-friendly and less Orwellian tactics for discouraging illegal file-sharing.

Piracy Surcharge on ISPs

Jim Griffin, a digital consultant for three of the four major labels, has been a

chief proponent of the idea that Internet Service Providers (ISPs) should collect a

surcharge from their users to be divided between music copyright holders. The

argument is that the Internet is like one big radio. Song-writers get paid when their

music is played on the radio and Griffin believes that artists are constantly being

deprived of deserved royalties when people stream music over the Internet.

Furthermore, there is the piracy issue.

This is an interesting idea, but it seems very flawed. Putting an effective

music tax on all Internet use just wouldn’t sit well with most Internet users. I do not

foresee ISPs agreeing to this kind of subsidy unless the government forced them to,

and I would be surprised if that happened. I think the industry would be better served

to look for synergistic arrangements like YouTube’s recent deal with the four major

labels. This deal allows YouTube to legally display copywritten content as long as

they use their content management tools to keep track of user activity and

appropriately compensate artists and labels (Gonzalez).

Different recording contracts

If albums are not selling as well, labels must devise methods to make money

without relying completely on album sales. This can mean either looking to emulate

the increasing success of many indie labels that generate profit through smaller

investments which require fewer sales, or the emerging 360-degree model that major

labels are utilizing for bands that they believe can become effective brands rather than

just hit-makers. 360-degree contracts allow labels to take a slice of artists’ concert,

merchandise, and sponsorship revenue.

The availability of inexpensive marketing tools and recording technology

make it possible to profit from smaller financial investments. I would expect this to

be amenable to label and artist alike if it’s effective. It may be less likely to make an

artist hugely famous with smaller contract figures, but I believe this is consistent with

growing “middle class” of the music industry. The opposite approach of the 360-

degree angle seems much more controversial. Artists might understandably be

concerned about giving up an even greater portion of their hard-earned money to

record labels. On the other hand, artists may welcome the long-term implications and

extra support associated with these multiple-rights contracts.

I expect to see both of these trends perpetuate. Artists from independent labels

will increasingly take bigger chunks of chart space, advertising background music

spots, etc. Major labels may experiment with smaller deals, but will also continue to

pursue bigger and more inclusive contracts. They will also continue the current trend

of purchasing or partnering with tour and management firms to expand their share of

concert and merchandise revenue (www.economist.com/business/

PrinterFriendly.cfm?story_id=9443082).

Subscription services

There are three basic formats for music subscription services. The first

involves monthly fees for a limited amount of downloads per month. A second

format allows unlimited “borrowing” of music as long as users maintain their

subscription fees. The last kind of subscription service gives away “borrowed” music

for free, but forces users to sit through significant amounts of advertisements to use

the service.

SpiralFrog is one of the ad-based subscription services. This service targets

individuals who are willing to spend significant amounts of time if they can download

music for free. Users must download songs individually, thereby encouraging users

to sit and watch the ads that support the service. Digital Rights Management makes

SpiralFrog basically irrelevant, as users can’t get music on a Macintosh, an iPod, or a

Sony Zune player (http://www.spiralfrog.com/pages/faq.aspx).

Rhapsody also deals in unlimited “borrowed” music, but for a monthly fee.

Subscribers then have an option to buy the music permanently. Again, DRM is a

major problem for this service because users simply can’t transfer this borrowed

music onto iPods, Zunes, etc.

Finally, we have eMusic, which offers different pay-based subscription

options that allow users to download, keep, and transfer a prescribed number of songs

per month. eMusic refused to sell MP3s that would play on any computer or portable

MP3 device. This has traditionally meant that only music from independent labels

has been offered through eMusic. The major labels’ recent willingness to change

their policy and sell DRM-free music through Amazon.com may signal a change in

the relevance of this kind of service. The business model has been successful for

eMusic, but has not gained mass popularity because of a limited amount of music

available without major label contracts. The death of DRM will change this. I see

this model of subscription service as the most likely to succeed under the industry’s

current conditions.

As a final note on this issue, the Financial Times have reported rumors that

Apple Inc. is looking into beginning a “borrowed” music style subscription service as

an option for their already successful iTunes music store. At this point, Apple has

declined to comment on this issue (Lundgen).

Videogames

Music video games make up approximately 8% of the 18.8 billion dollar U.S.

video game market for PCs, consoles, and portable systems (Hiatt, Rollingstone.com;

Riley, NPD Group). Music video games, which include games like Guitar Hero now

owned by Activision and Rock Band now owned by MTV, allow gamers to play

along to pre-existing songs on instrument shaped controllers and dole out points for

accuracy. On previous versions, the songs in these games were re-recorded cover

versions of popular songs. Now, labels are scrambling to get their original versions

of songs in to these incredibly profitable games. The potential in this market is

massive. Owners of these games can—and do—download hundreds of bonus tracks

to play along to their favorite songs and artists. As Activision music executive

explained to Rolling Stone in October of 2007, “We’re an entirely different revenue

stream that the music business didn’t have at their disposal five months ago.” (Hiatt)

Video games will not be a be a long-term solution for the industry’s ailments, but I

imagine it could provide a much needed revenue shot for the next several years while

these games maintain their popularity surge.

Bundling

A major hurdle that the music industry will need to deal with is the rise of

digital singles over albums. Consumers now have the option to purchase only a few

tracks from an album over the Internet, instead of shelling out for the full package as

they would have prior to the Internet era. The result is increasing transactions with

decreasing profits. My suggestion is that digital stores offer greater incentives to

purchase multiple items simultaneously: free album downloads with the purchase of a

t-shirt and a poster; three digital albums for the price of two; 2 free music videos with

the purchase of an album, etc. Sadly, the value of recorded music seems to have

decreased. Fortunately, however, the cost of distribution has also decreased. The

industry is presumably reluctant to contribute to a further devaluation of recorded

music by offering excessive discounts as suggested above, but I strongly suggest

looking for incentives to encouraging bundled purchases.

CONCLUSION

The causes for the recording industry’s downturn beginning in the year 2000

are vast, complex, and intertwined. Piracy may be a partial explanation, but even that

has not been proven. Increasing digital distribution in its current form will only

exacerbate the problem because consumers are purchasing single songs instead of full

albums—causing a decrease in overall profitability of recorded music. Labels must

therefore deemphasize massive album sales as a part of their business model. Major

labels can no longer focus on creating enormous hits to subsidize less successful

artists. They can either imitate the increasingly successful independent model

through smaller investment that require smaller returns, or they can involve

themselves deeper in an artist’s career by investing more and taking a share of profits

from touring, merchandise, sponsorship, publishing, etc. Furthermore, labels need to

find methods of infusing music sales with greater value by including discounts,

merchandise, and bonuses.

Many musicians are benefiting from these new developments in the music

industry. There are many new and innovative options available to unknown and

famous acts alike. Changes in the hierarchy of album sales and concert revenues

taken by artists both suggest a growing middle-class of musicians. Top musicians on

major labels make up a smaller percentage of album and ticket sales than they did

eight years ago. Furthermore, the market suggests a de-emphasis on album sales and

an increase in the importance of the growing concert industry. Massive success may

be harder to achieve, but I argue that new egalitarian forms of promotion and

distribution make meager to moderate success more plausible than ever. As a

musician, I view this as a positive change.

Finally, consumers are the true beneficiaries of the modern recording industry.

Digital Rights Management is obnoxious, but it is already disappearing. New

technologies make it easier to find new music and acquire recordings than ever

before. Social networks allow fans to share music and connect with artists in exciting

new ways. It will only get better as labels continue to offer superior services to

compete with file-sharing. If there is a downside for today’s music consumer, it will

be over saturation in a market where any serious musician has the tools for mass

marketing and distribution.

REALATION TO MY OWN COMPOSITIONS

My interest in the Recording Industry is quite personal. I am the singer,

synth-player, and songwriter for a band with professional aspirations. We are called

Red Wire Black Wire and we blend digital and organic sounds into indie-pop songs.

We are in the early stages of trying to figure out how best to distribute our music,

gain fans, and get paid for out efforts. Our debut EP is attached as part of this thesis

and I will briefly describe the history of my band’s efforts as a first-hand case-study

for the options available to new bands today.

After a year of performing together, the band was offered a recording contract

from an independent label. We met the owner of Drivethru Records because our

guitarist had played in a band in high school that had garnered some label interest but

did not end up getting signed. We played our demos for him and he came to see us

play live in Manhattan once. He later sent us a contract for a new, small imprint of

Drivethru known as Love Minus Zero Records. The contract offered a $10,000 dollar

recording budget and would have obligated us to produce four albums for the label if

they didn’t drop us before that. Our lawyer said it was one of the worst contracts he

had ever seen for an artist—selling our copyrights with no guaranteed tour support,

marketing, or distribution. Furthermore, the label owner was consistently rude and

difficult to contact. After a year of lengthy lawyer negotiation and rude treatment, we

decided not to take the deal and attempt to self-release a five song EP.

Modern, digital, recording equipment is incredibly inexpensive when

compared with tape recording technology from twenty years ago. My band recorded

most of the material for our EP using our own equipment that we’ve acquired over

the past few years. Basically, all we needed beyond our respective instruments was a

digital-audio interface, some microphones, and a computer with recording software.

We were also able to sneak in some time with nicer microphones by paying recording

students at discount rates.

Drums are more difficult to record, so we paid professionals for the sections

on the EP that have live drums. We also paid a professional mixer to help us perfect

the sound of our raw audio. Not including the equipment we already owned, we

completed the EP with about $3000 worth of studio time. We probably could have

done this for significantly less if we recorded drums at a cheaper studio.

We printed 200 copies of the physical CD for $1.80 each and used a website

called Tunecore that allows unsigned artists to sell their music on iTunes, eMusic,

Amason.com, and Rhapsody Music for a very small fee. We also maintain a

Myspace.com page so people can sample our music, and we use Facebook.com to

promote performances. Lastly, we’ve sent free copies of our EP to various blogs that

we know about from Hypem.com’s list of top blogs. The release has been mentioned

on five websites so far, one of which was feature on a high traffic website called

RCRDLBL.com. Without these social networking websites and blogs, I don’t know

how anyone outside of our friends and family would know about us.

Last week, we were given a proposal from a new “digital label” called Tough

Customer. This label focuses on Internet publicity utilizing blogs, social networks,

P2P sites, and search engines. In their written proposal to us, the label argued that

recorded music should serve mostly as a promotional tool for the band while

generating profits from “alternate revenue sources” such as “merchandise,” “tickets,”

and “licensing opportunities and placements in films.” The deal would be similar to a

360-degree contract where the label would take 20-40% of all of Red Wire Black

Wire’s profits including touring, merchandise, publishing, and album sales. I’m not

convinced that this deal is a good option, but I am interested in the idea of a single

profit-share based service that functions as a publishing company, booking agent, and

manager, and record label.

LIST OF MUSIC WEBSITES

Here I present descriptions of several websites relevant to this paper. Many of

the descriptions are quoted from the online encyclopedia Wikipedia.com or from the

websites themselves.

Myspace.com: “MySpace is a social networking website offering an interactive,

user-submitted network of friends, personal profiles, blogs, groups, photos, music and

videos for teenagers and adults internationally.” “MySpace operates solely on

revenues generated by advertising as its user model possesses no paid-for features for

the end user.” “According to Alexa Internet, MySpace is currently the world's fifth

most popular website, and the third most popular website in the United States, though

it has topped the chart on various weeks.” Myspace allows users to post their music,

videos, bios, tour information, pictures, etc. on their personalized pages.” (wikipedia)

Myspace also provides methods of directly contacting other members of the massive

network for free marketing. For instance, bands can look through “friend lists” of

similar artists and contact those fans who are most likely to be interested in their

music. Furthermore, musicians can now sell their MP3s directly from their myspace

pages through an imbedded store provide by snocap.com

Facebook.com: “ The website has more than 64 million active users worldwide.

From September 2006 to September 2007, the website's ranking among all websites,

in terms of traffic, increased from 60th to 7th, according to Alexa.” (Wikipedia)

Facebook has recently started allowing musician pages similar to those of Myspace.

iLike.com: “iLike has a free Facebook application which allows users to play clips of

music they like on their profile, show concerts they are going to and play a music

trivia quiz. The application had great success after its release, making it one of the

most popular applications on the Facebook Platform. As of November 2007, iLike

has more than 15 million users. With the launch of Facebooks Pages, iLike now

creates pages for bands.” (Wikipedia)

Youbtube.com: “YouTube … is a video sharing website where users can upload,

view and share video clips.” All 4 major labels have now signed deals with

google—youtube’s owner—agreeing to compensate labels for music video

publication.” (Wikipedia)

iTunes: “iTunes is a digital media player application, introduced by Apple on

January 8, 2001 at the Macworld Expo in San Francisco, for playing and organizing

digital music and video files. The program is also an interface to manage the contents

on Apple's popular iPod digital media players as well as the iPhone. Additionally,

iTunes can connect to the iTunes Store via the Internet to purchase and download

digital music, music videos, television shows, iPod games, audiobooks, various

podcasts, feature length films (available only in the USA), Movie Rentals and

Ringtones.” (wikipedia) iTunes is the second largest music retailer.

Amazon.com: “launched in 1995, Amazon.com began as an online bookstore but

soon diversified its product lines by adding VHSs, DVDs, music CDs, MP3s,

computer software, video games, electronics, apparel, furniture, food, toys, and

more.” (Wikipedia) In 2007, Amazon.com signed agreements with all 4 major labels

to sell MP3s online without any DRM restrictions.

Oink.cd: Oink's Pink Palace “(frequently written as OiNK) was a prominent

BitTorrent tracker located at Oink.cd (previously Oink.me.uk), which operated from

agencies described Oink as an online pirate pre-release music club; former users

described it as one of the world's largest and most meticulously maintained online

music repositories. About a month before the shut-down, music magazine Blender

elected Oink's creator, Briton Alan Ellis, to their The Powergeek 25 — the Most

Influential People in Online Music list” (Wikipedia)

Waffles.fm: launched almost immediately after police shutdown OiNK. Access to

this site is available by invitation only from pre-existing users. The following is

taken from their front page (note that 10/23/07 was the date OiNK was shutdown:

“-The sale of invites to this site (www.waffles.fm) is strictly forbidden and results in

both the inviter and invitee losing their accounts.

-Membership is free, users do not pay to have access to this site (www.waffles.fm).

We do not make any profit from this website (www.waffles.fm)

-We do not force our members to donate.

-None of the files shown here are actually hosted on this server. The links are

provided solely by this site's users. The administrator of this site (www.waffles.fm)

cannot be held responsible for what its users post, or any other actions of its users.

You may not use this site to distribute or download any material when you do not

have the legal rights to do so. It is your own responsibility to adhere to these terms.

-If you've been disabled on the 18th of February (GMT), kindly join the IRC help

channel.

-Never forget. 10/23/07” (Waffles.fm)

eMusic.com: “EMusic is an online music store that operates by subscription. It is

headquartered in New York, New York, and owned by Dimensional Associates, LLC.

As of March 2007 eMusic has over 250,000 subscribers, which makes it the largest

subscription-based online music store.

EMusic differs from other well-known subscription music services (such as Napster

and Rhapsody) in that the files available for download are in the MP3 format, making

them fully compatible with all digital music players, and free from digital rights

management software restrictions such as expiration dates, or copying or CD burning

limitations. (Wikipedia)

While lauded by many, the lack of digital rights management (DRM) encoding and

low price model have made the service unappealing to the Big Four record labels,

leading it to specialize in underground artists and non-mainstream music genres,

including indie rock, pop, jazz, electronica, new age, underground rap, traditional

music, classical music, and experimental music, all on independendent labels.”

(Wikipedia)

Last.fm: “Last.fm is a UK-based Internet radio and music community website,

founded in 2002. It claims over 15 million active users based in more than 200

countries. On 30 May 2007, CBS Interactive acquired Last.fm for £140m

(US$280m), making Last.fm the largest European Web 2.0 purchase to date.

Using a music recommendation system known as "Audioscrobbler", Last.fm builds a

detailed profile of each user's musical taste by recording details of all the songs the

user listens to, either on the streamed radio stations or on the user's computer or

portable music device. This information is transferred to Last.fm's database

("scrobbled") via a plugin installed into the user's music player. The profile data is

displayed on a personal web page. The site offers numerous social networking

features and can recommend and play artists similar to the user's favourites.”

(wikipedia)

SpiralFrog.com: “SpiralFrog is entirely supported by advertising, allowing free

download of its music. The ads are presented in the form of banner ads much like any

news website rather than in the form of popups or adware. Songs downloaded from

the service can not be burned to a CD, put on more than two portable devices and will

not work on Mac OS X or the Apple iPod, iPhone, or the Microsoft Zune.”

(Wikipedia)

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