Friday, April 01, 2005

Downloading is Killing Music! Really! We mean it!

In related news, Dallas Mavs owner and digital media mogul Mark Cuban offered an interesting rebuttal to claims made by the RIAA’s Mitch Bainwol about the impact of downloading on CD sales.

To summarize, Cuban points to the sales increases in digital media such as DVDs, digital photographs, video games, software and ringtones and asks how such increases are possible if downloading is such a proven leach on music sales, which, according to RIAA figures, increased 2.7% from 2003 to 2004. (As an aside, RIAA figures are by no means the end-all, be-all summation of music sales activity, but they're not a bad proxy either.)

I respect Cuban's overall stance on the issue, but I’m not sure that any of his examples are particularly good analogs.

I’ve never tried to download a movie off of p2p, but given the time it can take to download music, I would imagine that the time, bandwidth and frustration required to download that much data is prohibitive to most people.

Maybe I misunderstand the digital photographs example, but the only digital photographs I’m interested in buying are ones I shot or those that feature me and/or people I know. To get such photos, I can either buy them from oFoto or ask the person who shot them to e-mail them to me. Either way, it wouldn’t occur to me to log on to KaZaA to get these photos.

Video games: see DVDs. Downloading games is probably easier than downloading Lord of the Rings, but I’ve never been enough of a gamer to find out either way. Could be a good analog.

Software sales, Cuban notes, are flat, which is, obviously, better than declining, but it’s hardly a resounding contradiction. Plus, unless you’ve got access to serial numbers, user IDs, passwords, etc., downloading software illegally is sort of pointless.

So that leaves us with ringtones, which is an interesting contradiction. Ringtones are a fairly new phenomenon and I have no idea whether sales will continue to grow here. As many have noted, ringtones are more of a fashion statement than a statement of music taste. Kinda like wearing a Ramones or AC/DC t-shirt.

The whole “downloads kill music” debate has become a tiresome subject, largely because of the spin on both sides of the issue. I did a bit of private research on this purported tradeoff last year and a more comprehensive analysis by UNC-Chapel Hill economist Koleman Strumpf and Harvard Business School’s Felix Oberholzer can be found on Strumpf’s site

My own theory is that the business of CDs was a bubble economy that burst in 2000. Over 10 years, CDs went from occupying just over a third of the shelf space at record stores to nearly 95%, if you go by Recording Industry Association of America figures. Accordingly, labels forced retailers to ratchet up prices to an outrageous $20 and promptly based their business models around the assumption that those margins would last into perpetuity.

Then came a combination of events that amounted to a perfect storm:

  • The most significant and far-reaching event was that our country and, by extension, the world, landed in a recession. People lost jobs or disposable income at the very least.
  • Video game technology catapulted forward and that industry’s sales doubled those of the music industry in music's best year.
  • The DVD player hit a tipping point and DVD sales soared and, along with games, ate deep into consumers’ finite discretionary budgets.
  • Napster’s disruptive technology became a popular disintermediary.
  • Clear Channel effectively became a radio station monopoly, shrunk playlists and thereby limited people’s exposure to – and, consequently, interest in – music.
  • Major labels went into something of a death spiral: decreasing resources led to a decreasing number of new releases, which led a decreasing number of massive hits, which led to decreasing resources. Rinse, wash, repeat.

As much as I admire p2p as an innovation in content distribution and marketing, I’m not going to play Pollyanna about its impact on CD sales. I have no question that some sales have been lost as a result of downloading. But, as we’ve learned from the experiences of the automotive, banking, energy and airline industries (to name but a few), we should be deeply skeptical when an industry asks the government to act so that it doesn’t have to. Specifically, I wonder about the extent to which those CD sales were redistributed.

As Strumpf and Oberholzer noted, countless downloaders used p2p as a filter to either spare them spending $20 on a release that wasn’t worth it or to validate that an act recommended by a friend was as good as advertised.

Also, how many of those lost sales were made up for by sales that RIAA figures don’t include? For example, how many people downloaded some Drive-By Truckers tracks, liked the band, went to a DBT show and bought the CD directly from the band at either the show or off its web site. Either way, that’s one of thousands of sales that SoundScan and the RIAA don’t count.

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