Embrace file-sharing, or die (part2)
II. Competition for the CD
The current argument over intellectual property is the result of the sharing of music files encoded as MP3s, Windows Media files, RealAudio files or other formats currently available. The music business blames these downloads, which it perceives as piracy, for the 10 percent decline in sales for the year 2002. This raises several questions, among them: How and why do people listen to music? What other products compete with CDs? And what is the role of radio?
Why is it that record companies pay dearly for radio play and fight Internet play? What is the real difference between radio and the Internet? Perfect copies? If we look at the Internet as analogous to radio, the problem becomes one of performance rights, not the unlawful exploitation of intellectual property. People are creating their own "radio" on their hard drives, and they are constantly changing it. Would this have anything to do with the "McDonaldization" of radio by Clear Channel and others? Would the fact that almost every song on commercial radio is bought and paid for have anything to do with the narrow focus and homogeneous nature of radio? What drives radio is advertising and money, not music. A lot of music gets left behind thanks to the current state of radio; that consumers are rejecting it shouldn't be surprising. They're creating their own MP3 playlists, and if the labels were smart, they'd be doing everything in their power to be on those playlists, just like they do everything in their power to be on the playlists of radio stations. Instead, they scream copyright infringement and call their lawyers.
There are other reasons for CD sales to be down.
Dan Bricklin and Forrester Research list reasons for the drop in CD sales:
"... the economy, competition from other forms of entertainment (including the yearly $6 billion of video games and the rush to the new DVD video format), and finally the shorter playlists on radio (partially a result of Clear Channel's control of 60 percent of rock radio listening and their style) that leads to fewer new musicians becoming well known ... MTV is playing fewer music videos, and in general, there is a record industry style to push a narrower range of musicians. You can imagine that the death of Internet radio will also cut down on the ways to find out about new music."
Price is a major reason for the decline in CD sales. On Bricklin's Web site there's a chart that shows that between the years 1991 and 2001, the average price of a CD went from $13.01 to $14.64, which is a 12.53 percent increase in price. The record companies raised prices precisely at the time costs were coming down. When a DVD costs $19.99 and includes the movie in multiple formats with bonus material 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. To put it simply, consumers feel that out of all their entertainment options, CDs provide the least bang for the buck.
There are five or six new and growing ways for people to spend their entertainment dollar. The video games market is one place the consumers went, and music followed suit. VH1 News recently reported that the new place to break an artist in is a video game. Some companies, such as Island Records, know this. They have a great track record of getting music on video game soundtracks. But unlike Island, most don't. There are other distractions that draw business away from the record companies: DVD, the fastest-growing home electronics development in the history of the world, the Internet itself, e-mail, cable TV, movies, and even mobile phones. In addition to that, the product marketed by record labels is narrow and significantly overpriced in comparison to the other available entertainment options. Portable CD players are being replaced by iPods. Instead of the 12 songs on a CD, there are 1,500 songs on an iPod. Why shouldn't CD sales be down? Truth be told, the record business is lucky to be alive.
Ananova.com reported that 3.8 million DVD players were sold last year, double that of the previous 12 months. DVD sales reached 80 million last year, representing a 111 percent increase over 2001. Twenty million DVDs and 1.2 million DVD players were sold in December 2002 alone. The movie industry sold 1.6 billion tickets, taking in $9.3 billion in gross box office receipts in 2002, up 11 percent from the previous year, despite President and CEO of the MPAA Jack Valenti's recent statements that the future is bleak. Not since the 1950s have so many movie tickets been sold. Meanwhile, movie sharing on the Internet is at an all-time high. The movie business isn't suffering because of activity on the Internet. Quite the opposite -- the industry is making more money than ever! This is happening at a time when consumers are being offered more choices to view movies than ever before. This supports the view that people spend more money when they have more choices.
Advances in hardware and software have propelled the movie business ever since the VCR, which at the time was decried as the death of the movie business, just as the cassette was to be the death of the music business. In both cases, these "copying" devices enhanced their respective businesses. Whether it's the MPAA or the RIAA, there is no reason to trust those who have cried wolf in the past about new technology, especially when history has shown that advances in technology increase consumer spending.
Then there is the reality that the Internet is changing many businesses. EBay, the fastest-growing and most profitable of the major Internet companies, is selling everything in entertainment (and everything else) to scores of millions of people every week, including music and musical instruments. As a result, they have put many music and instrument stores out of business. In an era of rapidly evolving technology, businesses that adapt will survive, those who don't, won't. As reported by the New York Times on Jan. 17, 2003:
"EBay reported a profit of $87 million for the fourth quarter, more than triple the $25.9 million posted a year earlier ... Revenue was $413.9 million in the quarter, up 89 percent from a year earlier ... For the full year, eBay earned $249.9 million, up from $90.4 million a year ago. Sales increased 62 percent to $1.21 billion ... Last year, a total of $14.9 billion worth of merchandise was sold on eBay. This is just shy of the $15.5 billion in sales analysts expect this year from Federated Department Stores, the parent of Macy's."
These are startling numbers, and they reveal the way of the future. According to the Times, sales at Amazon increased 28 percent, to $1.43 billion, and this in the face of one of the toughest retail markets in years. They did this by expanding their product lines (to include clothing) and offering free shipping to consumers whose orders exceed $25. They did it by providing greater service for less money. Perhaps the music business will take note.
It is true that downloading music is a very popular entertainment option for many people. The number one P2P application, KaZaA, was downloaded 3,145,095 times during the week of Jan. 6-12, 2003. The number two P2P application, iMesh, was downloaded 440,877 times during the same period. KaZaA estimates that it had 140 million users by the end of 2002, twice as many as Napster at its peak. These fantastic numbers indicate a desire among consumers for music that the music companies traditionally satisfied but increasingly no longer do. This raises another question. Why don't the record labels have P2P networks? They have proven to be wildly popular. They don't require expensive investments in technology to start and maintain, and most importantly, the online community has embraced them wholeheartedly. The reason is, they can't agree with their "partners" -- publishers and artists -- on how to share the money. The same greed that got them into their current problem prevents them from extricating themselves from it.
Let's suppose I'm a kid. I have a fixed allowance or a minimum wage job. I have $100 a month to spend on entertainment, if I'm lucky. With that cash, I can rent or buy DVDs, pay for my Internet connection, go to a concert, a movie, or a sporting event (at which I might buy some merchandise), buy a video game, pay my mobile phone bill, drive through the drive-thru, or buy a CD. From that list of options, what's the least likely thing I'm going to spend money on? I think the answer would be the CD, even if downloaded music didn't exist. I would argue that it's not the presence of a "free" alternative that has caused the decline in CD sales, it's the presence of competing choices offering more value and fewer hassles. |
