…takes issue with U2 manager Paul McGuinness’ recent assertion that piracy is the main reason for the past decade’s decline in music sales.

Paul McGuinness has managed the business career of one of the greatest musical acts ever to live on this planet. U2 continues to amaze us, delight us and impress the world with a combination of musical genius and indubitable passion. The world is a better place because of U2.

Paul’s essay in GQ entitled “How To Save The Music Business” fails to consider some basic facts as to why the recorded music business is less than 50% the size it once was (and in a continued spiral downward). In an attempt to respond to Paul’s call for a reasoned debate about the future of the business, I’d like to bring to light some of these facts.

Paul, like the position of the RIAA, IFPI, and most traditional record executives, exclusively blames piracy as the preeminent cause of the undoing of the recorded music business. Piracy is certainly a problem. Most reports tell us that illegal file sharing activity dwarfs legitimate recorded music purchase activity on a scale of 10 to 1. But there are many other reasons why people spend less money on music today than they used to and it’s instructive to review them:

The Unbundling of Music

With the birth of Napster, we learned of the incredible demand for singles. Consumers no longer had to buy a record of 12 tracks to listen to the one or two they really cared about. In 2003 when iTunes popularized digital download sales, this trend continued. Now we learn seven years later that singles are once again becoming the measure of an artists’ true popularity, not album sales. The unbundling of the album is probably the single biggest reason for the massive decrease in per capita music spend. As such, the recorded music industry’s revenues were probably over-inflated as a true measure of demand at its peak. That is, although the industry approached $40B in sales worldwide in its 2000 peak, the true demand was probably much less. Once the industry allowed for the unbundling of the CD, they were able to understand consumers’ true appetite for recorded music, song by song. By this count alone, if the same consumers who used to spend $12 – $15 per album now only buy the one or two tracks per album they really want, they only spend $1 – $2 now. This is at least an 87% decline on a revenue unit basis and could easily account for the massive fall-off in sales. (Incidentally, in the U.S., the cable television industry may one day experience the same effect. If U.S. consumers are ever able to pay only for the channels they actually want to watch, or more dramatically, just the shows they watch, total subscription TV revenues may fall dramatically. That’s a topic for another post…)

Mispriced Music

Over the past fifteen years, consumers have been inundated with more entertainment choices for their limited disposable income: video games, text messaging, DVD rentals, streaming movies, virtual goods, ring tones, and more. Many of these products and services have fallen in price over this same period. In the U.S., Walmart sells many DVDs for between $5 – $10. However, until last year, music prices actually increased. To confront falling sales, in 2004, Universal actually raised prices and then again in 2009 led the effort to force Apple to increase prices to $1.29. Since we know music is elastic, rising prices slow unit sales and lower prices increase it. It’s quite possible music is not optimally priced to maximize profit and this, too, has contributed to a decrease in appetite for recorded music, especially in the face of such fierce competition and plethora of choices confronting a consumer with limited spending ability. From my experiences at eMusic as CEO where we experimented with music pricing versus demand, the optimal price for music singles is likely closer to 50 cents than $1 for most music.

Protectionist Licensing Policies

Let us not forget that from the birth of Napster until the launch of Apple’s iTunes was a seven year period. Seven long years. During that time, despite clear evidence from millions of consumers in their interest in downloading music, consumers could not buy digital music legally. This missed opportunity provided consumers with no choice but to steal music in order to get it conveniently — for seven years! Although Paul prefers we forget the past in order to fix the future, one cannot ignore that it was the resistance to widespread licensing of catalogs that likely had the largest effect on enabling piracy. Why is this important to note? Because even to this day, sensible licensing policies do not exist. It takes far too long, is far too unpredictable, and still requires senseless upfront guaranteed minimum fees in order to broadly license music catalogs. These policies have frightened away the best entrepreneurs and investors who see little reason to try to innovate in music. Paul implores the tech industry to apply its resources to help the music industry. In particular, he wants Steve Jobs to launch the “music access” model (despite the fact that this already exists in the form of Napster, Rhapsody, MOG and Spotify with mixed success). In order to get others to launch more music services, the industry must first adopt simple and sensible licensing policies that invite and encourage entrepreneurs to build businesses around the sale of (or access to) music.

It is all too convenient to dismiss those who disagree with Paul’s “The ISPs must police the internet” solution to the music industry’s ills as an angry mob. In the spirit of productive conversation, it’s important to remember that there are other more likely explanations for the decline of the recorded music industry. In order to see it grow again, many of the policies adopted by the executives Paul lauds in his piece will have to change. As a one-time struggling artist myself, I want nothing more than to see musical artists prosper. But it’s the decisions made by the traditional record labels struggling to cope with a vastly changed distribution landscape that just might have brought us to this point.

(Incidentally, I have discussed ways the industry could move forward more productively on my blog.)


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    All three of these are spot-on, but I think that the first is most important. The iTunes Music Store really did create a paradigmatic shift that people are still adjusting to.
    Really cool that you’re blogging for MIDEM, David.

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    I don’t have any stats on this, but I have the sense that music buying is largely a young person’s game, where those under 35 make up the largest share of consumers. When we shifted from music as a physical product to music as a few blips of magnetic charge, we took away the mojo of the purchase decision. It wasn’t very long ago that I found myself saving carefully to feed my CD habit, dropping by the record store on a regular basis, and seeing my collection provide some bragging rights among my peers. Piracy or not, it wouldn’t be so strange to me that we buy less music today, when buying music provides such parsimonious emotional satisfaction by comparison.

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    BJ, it is actually the opposite. Most music is now purchased by people older than 25. Of course, 10 years ago, it used to be the opposite. But younger people by and large don’t buy very much music anymore compared to adults.

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    Great post, David… I subscribe to your blog and really enjoy your writing. Licensing is so convoluted in the music industry, even after several explanations by co-workers and superiors, I still struggle to keep even a very basic understanding of the process. I am all for simplicity and sensibility, but I fear we are the minority.
    I agree with Max (WAMMusic), the introduction of iTunes is something that I see people still getting used to. Hell I’m still not 100% used to the platform, since I usually try to buy music directly from the artists.
    Anyways great rebuttal, thanks for that!

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    Two points: I agree that the “optimal” as you call it, price of a single digital track is or should be about 50 cents — this is what online users are willing to pay now. Then, however, you have the credit cards’ or other payment processing fees, which can reach 30 cents per transaction, publishing or copyright fees, taxes (outside the US), etc. In the end, the retail prices have to be much higher or you are to sell at a loss. It seems then that in addition to any pricing or licensing reform, there has to be a much larger industry reform addressing the (unnecessary) complexity of the distribution and sales policies.
    Second, and more positive, there are music companies and executives who are flexible and innovative. One example is The Orchard. We (buymyplaylist.com) have just signed a deal with them that we wished could have been a model for licensing agreements with our other music providers. I can’t disclosed the terms here, but will say it addresses the major issues of the “senseless upfront guaranteed minimum fees,” price elasticity, differences in optimal pricing in different geographic and tax areas, etc. I hope the deal will be successful. If not, we will at least be able to say that we’ve tried — thanks to The Orchard’s new thinking and their willingness to share the risk.

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    You’re not mentioning those people that got burned.
    Went the legitimate way of buying music for it to be DRM’d and then either:
    1). Not being able to play the music on a device of their choice
    2). Having their licence corrupted, or revoked (for some reason like turning off the DRM servers or something)
    DRM is hard work for the user, I don’t think I’d buy DRM music any more after losing great parts of my collection due to no fault on my part.
    (Eg. My Coke Music to name one, part of the OD2 but sheesh, why should I care, I just bough music)

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    Interesting points. I’m still curious to know what exactly the right price point is. I hear lots of opinions. But what about real research?
    About young people buying music: how can they without a credit card? I know there are alternatives, but they haven’t really gotten much traction.

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    There are ready solutions for the lack of credit cards among the younger buyers of online music. In fact, there are services that offer its members an opportunity to “earn” music while playing music — sellaband.com does it; buymyplaylist.com (my own company) does it as well.
    These services, however, require some initial engagement and more active participation on the side of the user than the biggest “music stores” do. They are not for everyone, at least not now. Perhaps, when they reach the critical mass necessary to make the entry barrier seem like “next to nothing” — just the way PayPal registration feels like, once you’ve done it — then they can be very cool and easy to use.

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    Great article and almost totally spot. I have worked in digital music for over ten years and it is an extremely tough game for all those involved, despite what the prevailing wisdom is.

    While I agree with almost everything you say, the only thing that I am undecided about is the ISP question. I really struggle to decide if this is the only “ethical” impediment to a balanced and fair digital music ecosystem.

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