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Is Piracy Really Killing the Music Industry?

Originally posted on sciy.org by Ron Anastasia on Tue 06 Mar 2007 11:11 PM PST  

I stumbled upon this remarkable website a few weeks ago and have become a regular reader. Its author, Daniel Eran, imo is one of the most informed observers of the computer and digital entertainment industry, especially the ongoing battle between Microsoft, Linux and Apple. Highly recommended.  ~ ron

RoughlyDrafted Magazine: Tech Q1 2007


Is Piracy Really Killing the Music Industry?

© 2007 by Daniel Eran
Wednesday, March 7, 2007

Various music industry trade groups claim that piracy is killing their industry, and are suing file traders and the sites they use. Are music sales, revenue, and profits down? Are MP3 downloads preventing music sales or do they instead help advertise new music? Are paid music downloads profitable or are they still insignificant?
 
Let's Ask the RIAA
Unsurprisingly, the music industry's own research and opinions on the subject support the idea that unauthorized distribution of music is killing both sales growth and profits. The result: music costs more to produce, there's greater risk in signing smaller acts with uncertain audiences, and the lower sales volumes have forced the labels to raise the retail price of CDs.
 
From the label's perspectives, the only solutions are to:
 
  1. •lock down music so users can't share the copies they buy
  2. •prosecute file traders and win settlements against them to discourage the practice
  3. •institute market pricing for music, so buyers pay more for popular music and less for back catalog music
 
Isn’t The Customer Always Right?
The RIAA has its critics, many of whom are music customers. Among them are:
 
  1. •the free and open source software crowd, who like the idea of freely shared content
  2. •people who don't want to pay for things that can be found for free, and don't like being sued
  3. •people who don't want to be restricted in their use of purchased music
  4. •companies who don't benefit from the market pricing of music
 
Before looking at the merits of the RIAA’s complaints and examining their own data on sales, take a look at the rational presented by its various circles of critics, and see whose perspective best fits the facts.
 
Free as in Beer, Speech
Among the most effusive and articulate of critics are the minds who make up the volunteer collective of free and open source software. These people have spent a lot of time thinking about the nature of shared ideas and intellectual property, and some try to apply the principles proven to work in delivering shared, open code into the world of entertainment.
 
The difference, of course, is that free and open source software is written by volunteers. GNU/Linux, BSD, and other projects' code can be shared as desired by their creators.
 
The GPL and BSD style licenses seek to enforce different schools of thought on how content should be shared. However, neither can be applied to the commercial music represented by the labels, because none of that music is free or open.
 
Britney Spears' music is just as closed and proprietary as Microsoft Windows, and nobody has rights to distribute it under a free license, just as Microsoft has no rights to distribute Linux code without following the license provisions of the GPL.
 
Reasonable proponents of free and open content don't confuse unauthorized use of commercial music with "free content," and have instead sought to create their own music, movies and other entertainment, and share them under agreements like the Creative Commons licenses.
 
In their ideal world, there would be no DRM, no or at least few middleman labels selling their representation and marketing, and musicians and other performers would be supported by user donations, sponsoring companies, or perhaps sunshine and love.
 
Think of the Children
While many free and open source software proponents are intelligent, experienced, and affluent, there is an epidemic of poor and stupid people around the world. Many of them have been quarantined into higher education campuses in a social engineering experiment to educate them and make them valuable to society.
 
All that exposure to education and liberal thinking--considering facts and being willing to change their outlook based upon that new information--frequently results in more free and open source software proponents, with less attraction to music from Britney Spears and a greater interest in the work of smaller indie artists.
 
Along the way however, the problems of being poor and stupid commonly result in run-ins with authority. The RIAA is increasingly becoming a prime example of this; it has been targeting the poor and stupid to create fear, uncertainty, and doubt about the safety of trading files.
 
The RIAA mounted its legal attack just as sales of music to younger demographics appeared to collapsed in tandem with Internet file trading. However, things are not always as they appear, as the numbers indicate later.
 
The Scarcity Behind Supply and Demand
In trying to emulate their smarter and more experienced role models, the poor and stupid have tried to create economic arguments against the commercial existence of music.
 
A recent popular meme is to describe music as a "non-scarce good" and DRM as an artificial construct designed to convert music into a scarce good, one that can command a high price. This argument is absurd.
 
Music itself--as well as movies and other forms of entertaining, intellectual, and artistic performances--is most certainly a scarce good. It costs many thousands of dollars to produce an album, and millions to create movies.
 
That expense, related to not only the "above the line" performers, but also the "below the line" technicians involved in production, and expenses in advertising, promoting, and the various administrative costs, all make music and other productions very expensive projects. Expensive things are scarce.
 
If the resources to produce music were not scarce, there would be no American Idol or Star Search, and the planet would have 6 billion rock stars. Music is a scarce good. The fact that it can be mass duplicated after production finishes does not make it a non-scarce good. There are lots of ideas with clear and obvious value that are not tangible nor consumed:
 
  1. •Currency is artificially scarce. Anti-counterfeiting measures are essentially a “DRM,” protecting the value of currency and propping up the economy.

  2. •Apartment rentals invent artificial scarcity to exchange privacy for money. A landlord could shove a dozen other people in your apartment. By not sharing your space, value is created and rent rises.

  3. •Consulting work is similarly based on the scarcity of an expert's time. If time and space knew no boundaries, we could all be experts in every field and solve each other’s problems for free.
 
Time and space are constrained however, as are raw materials, talent, and good ideas. All those constraints result in scarcity, which demands effort and expense to collect, expend, or consume. We vote on how to distribute scarce things with our money.  
 
Counterfeiting vs Piracy
Arguments that “ideas” like music have no value because they can be duplicated are as fallacious as suggesting that a copy machine creates value when it counterfeits money. No, it doesn't.
 
Fraud might temporarily enrich the counterfeiter, but it steals from everyone else who has worked for their money, because a fraudulent supply of money devalues real money.
 
Counterfeiting is such a threat to the worlds' economies that governments enact harsh punishments for counterfeiters, invest in developing anti-counterfeiting methods, and carefully police their money supplies.
 
It is therefore no surprise that unauthorized copying of music is similarly viewed as a serious threat by those who benefit from a tight hold on its supply, or that they are interested in DRM as a mechanism of preventing copying, or that they are work to create strong copyright laws, penalties for evading the law, and are suing those who do.
 
The main difference between money counterfeiting and music piracy is that nobody benefits from counterfeiting apart from the counterfeiter, while more people benefit from freely duplicated music: pirated music doesn't only eat into music sales, it can also act as an advertisement and promotional tool.
 
Record companies have long played their music on the radio for free, something that has no analog in the comparison to counterfeit money. The real question is: to what extent does file sharing hurt or help the industry?
 
The Real Customers
Neither the free and open source software people--who aren't interested in commercial music--nor the poor and stupid--who don't want to pay for music at all--are ideal customers. The real customers are people who buy music. They buy millions of CDs every year, and an increasing number are buying song downloads online.
 
This pool of people make up the sweet spot. Record labels take them for granted, and focus most of their efforts on trying to herd people from the first two groups into this population, using threats of lawsuits and other forms of intimidation, including the use of often excessive DRM aimed to force paying users from ever leaving the pool and joining those who don't pay for what they want.
 
Carrots vs Sticks
People respond better to positive, welcoming carrots than the stick of a police crackdown. Give an employee a critical summary of their screw-ups, and they will immediately stop listening to everything you say and consider you a bad manager. Highlight what they do well, and they will turn themselves inside out to please you.
 
The same principle applies everywhere else humans exist. Send police into a poor, crime ridden neighborhood to "control crime" and the crime will continue, and probably increase. Provide education and create opportunities, and those same people will clean up their own neighborhood.
 
America's wars on Terror, Drugs, and Science have not resulted in victories, only in huge prison populations that cross-train fiercer criminals and in publicity campaigns than only appeal to those who designed them. If the US would dial back into its recent history, it could discover that investing in education and creating opportunities for advancement would solve its problems with much less spending and far better results.
 
Similarly, if the record labels really want to expand their pool of paying customers, they need to focus on creating sales instead of attacking the poor and stupid who are unlikely to pay for their product anyway.
 
The labels are so afraid of change that they failed to recognize the potential for digital music sales a decade ago, and have more recently dragged their feet in getting behind sales of music downloads.
 
Companies Against the Market Pricing of Music
The forth group critical of the music label's policies also represents a huge part of the solution to the music industry’s problems.
 
That group includes Apple, which makes very little money in selling music in its online iTunes Store. Increasing the price of music is not in Apple's interests at all, because the company is primarily hoping to ensure a supply of music for its players.
 
Of course, Apple is also interested in expanding the supply of music sold through its online store. This both brings attention to its hardware sales, as well as enabling the company to expand its sales into TV and movie programming. Obviously, the more music that Apple sells, the more revenues the labels will earn.
 
Apple is the carrot that music labels can use to reward customers for buying their music: offering a wider selection of artists and a deeper catalog to encourage more sales. As people discover more music they like, they will in turn buy more music.
 
Alternatives to iTunes have failed primarily because instead of handing out an attractive carrot, they threatened users with a fearsome DRM-armored stick. MiniDisc and DAT were so encumbered by restrictions that they negated their own benefits.
 
Microsoft's PlaysForSure and Sony's ATRAC similarly applied layers of DRM to suit the needs of producers so egregiously that consumers were left with little reason to buy their products.
 
What Do the Facts Support?
Do the facts indicate that the labels' lawsuits, DRM, and market pricing strategies are effective? Are the assumptions that music sales, revenue, and profits are down accurate? Does file trading preventing music sales or does it instead help sell new music? Are paid music downloads profitable or are they still insignificant?
 
Take a look at figures reported by the RIAA itself. One warning sign: The RIAA contrasts "physical sales," the vast majority of which are CDs, with "digital sales," by which it intends to mean “music downloads.” It is somewhat scary that the RIAA in 2007 is not aware that CDs are digital music.