Dan Bricklin's Web Site: www.bricklin.com
The Recording Industry is Trying to Kill the Goose That Lays the Golden Egg
Given the slight dip in CD sales despite so many reasons for there to be a much larger drop, it seems that the effect of downloading, burning, and sharing is one of the few bright lights helping the music industry with their most loyal customers.
Josh Bernoff, who once worked with me at Software Arts, did an interesting survey for Forrester. He's quoted in a Forrester press release titled "Downloads Did Not Cause The Music Slump, But They Can Cure It" as saying: "There is no denying that times are tough for the music business, but not because of downloading. Based on surveys of 1,000 online consumers, we see no evidence of decreased CD buying among frequent digital music consumers...Plenty of other causes are viable, including the economic recession and competition from surging video game and DVD sales..." Intrigued, I thought I'd look a little closer to see what might be causing the decrease in CD buying.
What is affecting CD buying according to the data?
To get some data to understand CD buying, I looked to both Forrester and the Recording Industry Association of America (RIAA). First, I looked to find more of what Josh Bernoff found. Some of that is presented on the Forrester web site on the "Downloads save the music business" page. (Listen to the video/slide presentation.) I also looked at the RIAA "News Archive" page to get some of their numbers and statements. Finally, I looked around me to see behavior on the streets and among friends and relatives.
Josh breaks down the music download/burning and CD-buying public into various categories. The categories, from lowest use of downloading and burning to highest, are the "Offline" people, the "Nonusers" of digital music, then the "Dabblers" who have tried it but do it infrequently, the "Digital Music Learners" who do some (downloads, rips, or burns 3 to 8 times a month), and finally, the "Digital Music Lovers" (over 9 times a month). Based on the full report he kindly sent me when he learned of this analysis, I calculated: People who never download or burn their own ("Offline" and "Nonusers") make up about 54% of the population and only buy about 39% of the CDs. Using values explained below of about 881.9 million CDs and 239 million people over 9 years old, that yields a value of 2.7 CDs purchased per year per person. Those that do sometimes download and burn their own (combining the other categories) make up 46% of the population yet buy 61% of the CDs (4.9 per year each). Of those, the "Lovers" and "Learners" make up only 22% of the surveyed population, yet buy 36% of all CDs (6.1 per year each). The "Lovers" alone make up about 5% of the population and buy about 15% of the CDs (9.7 per year each). So, it seems the more you buy, the more likely you are to download and burn your own, or, to put it another way, the more you burn the more you buy.
Bernoff, in his Forrester report, discusses what he sees as the real reasons for a drop in CD sales: the economy (he says on his video presentation that in the pre-Internet early 1990's economic downturn there was a "significant drop in the growth of CD sales"), 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% of rock radio listening and their style) that leads to fewer new musicians becoming well known. I also hear that 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.
The RIAA also provides numbers. I looked at their web site and looked at the yearly reports that come out in January or so, giving the sales figures for the previous year. They include the number of "units" of music sold, and the dollar amount of revenue that those units represent at retail. They also break things down by different media types, such as CD albums, CD "singles" (another, no longer popular, format), cassette tapes, etc. I looked at the 2000 report and the 2001 report to get numbers from 1991 through 2001. I typed some of them into a spreadsheet and "crunched" the numbers a bit to figure out average retail price (sales dollars divided by units) and year to year change expressed as a percent. Here is what I came up with (there may be rounding effects, and I haven't rechecked all of my typing):
Units have dropped, but revenue has not dropped as much because of an unprecedented 7% rise in prices. With a poor economy, basic economics says that a rise in price of a discretionary item already priced above the optimum point may result in a drop in total receipts. The history of results from large CD album price rises shows consistent negative changes in unit sales. As you can see with CD singles and cassettes, there is a life cycle with each format and CDs should be no different. Examples of other factors that affect sales that RIAA mentions include the 1997 effect of tighter retail inventory controls and retail consolidation that they blame for the 1997 drop in revenues (no mention of the price rises). In early 1997, trying to explain a 2% growth year after years of CD-driven double-digit growth followed by a drop in unit sales after a CD price rise, RIAA president Hilary Rosen said that "Two percent growth [in 1996] is positive news." She neglected to say "Prices were the same or lower."
Trying to make a case against digital music downloading and burning, RIAA also reported that its own survey of music buyers showed "...over 50 percent of those music fans that have downloaded music for free have made copies of it. Just two years ago, only 13 percent copied it onto a portable device or a CD burner." They also report that in 2001 40% of all "music consumers" owned a CD burner compared to 14% in 1999. (This matches Forrester's 45% number from mid-2002.) They say that "23 percent of those music consumers surveyed said that they did not buy more music in 2001 because they downloaded or copied most of their music for free". It is unclear if those people didn't buy any music, or just didn't buy more than they did (but since they call them "consumers" and not "fans" they imply that those people do buy), nor whether the other 17% who have burners said they bought more. (Bernoff's say this is the case: "...while 13% [of Digital Music Lovers] say downloading will decrease their music purchases, 39% say exposure to new music online increases their CD buys.") In any case, it is clear that those people that download and burn music generally still buy a lot of music when they could have gotten it "for free". In fact, they still buy most of all music.
If downloading invariably led to a cessation of buying, as RIAA implies, music sales would be off by a much, much larger amount. Further trying to bolster their argument for controlling digital music, RIAA claims that "If just half of the blank discs sold in 2001 were used to copy music, that would mean that the number of burned music CDs worldwide is about the same as the number of CDs sold at retail." You'd have to assume, reading such material, that if it weren't for personally copied music, CD sales would be double, and with the copying they should have dropped by at least half, not 10%. (Like the RIAA, I'm ignoring here the effects of illegal, unlicensed commercial copying that has been around for years.) This doesn't match what we're seeing in the sales numbers, so something must be wrong with their logic despite its seemingly "obviousness" to those of us who don't buy many or burn many music CDs. (I do burn a lot of data CDs, though, to share my photos and backup my data.)
To put the RIAA's "number of burned music CDs worldwide is about the same as the number of CDs sold at retail" in perspective, let's look at another way that music fans learn about and sample music: Radio. If you assume there are 1,000 U.S. radio stations each reaching 50,000 people, playing 10 songs an hour for 10 hours a day, you get 1,000 x 50,000 x 10 x 10 = 5 billion songs heard each day. (Since Clear Channel has about 1,000 radio stations alone, and claims 110 million listeners every week, this is probably a reasonable estimation.) If you assume about 15 songs per CD, and that each CD is played by its owner 20 times, then radio would equal all the playing of the approximately 900 million CDs bought last year about every two months, or 6 times a year. (I'm assuming about 1 in 5 CDs you buy becomes a "favorite" that you play over and over for years, and most others just get played a few times.) If "free" listening is a problem, then radio is much more a factor to be feared.
Why the "obvious" answer may be incorrect
When trying to understand people's motivation and behavior, introspection is inappropriate if you aren't one who thinks like those you are trying to understand. You need to use something else, like surveys, research, and real numbers dealing with how those people actually behave. Unfortunately, Bernoff reports that "The music label executives we spoke with are so sure piracy is destroying their business, that they seemed strangely uninterested in the truth." Politicians who listen to such people do society and the musicians a disservice.
I remember when in the old days of telephone hacking in the early 1970s one very active phone-hacker at MIT was interviewed by Bell Telephone people for a magazine article. The Bell people were completely dumbfounded when he told them that his personal telephone bill was often over $100 a month (in 1970 dollars!). They assumed it would be near zero. It turned out that he liked communicating by telephone, and blue-boxes and stuff weren't for everything at all times. The "free" calls led to him spending more. (In this case his "free" calls were "subsidized" by actual phone company equipment and phone company payment of international calling fees. In the case of music, the music industry does not subsidize the shared music with out of pocket costs, like they do with music videos or radio payola.)
I believe that there is a segment of the population that buys a disproportionate amount of the music (that old "80/20" rule). At least one such segment showed up in Josh Bernoff's numbers. According to the RIAA numbers, given the 239 million US residents over the age of 9 reported by the Census Bureau, the average person must have bought about 4 units of music in 2001, 91% of them CDs. If you didn't buy a lot of CDs before Napster (let's say, more than 6 a year) your feelings don't count, since you probably haven't downloaded music, and probably buy most of your music on impulse at concerts or such, or as gifts. What we want to understand are those people who always did buy most of the music and are now downloading. We want to understand those people who have CDs playing constantly in their lives: In their homes and as they stroll, commute, or travel.
The buying cycle
What we haven't seen is a detailed model of how music buying comes about. The RIAA would have you believe that there is a simple fixed demand that is then diminished by any copies people make on their own of music obtained from others. That is clearly too simplistic a model for almost any emotionally-charged buying behavior. How does the demand occur? Is there a difference in the buyer's mind between a "real" CD and downloaded copies? What is the relationship between the "fan" and the artist and what role does the physical CD play in that relationship? All of these are important questions, and there are many others.
For example, demand can occur when you learn of a musician you've never heard before through hearing one or more of their songs "for free". You find out about the "new" musician through friends, radio, and other means. (For example, some musicians are getting their big "break" by having one of their songs used as the music in a commercial.) After sampling the music enough times you may decide that you like it enough to buy an entire CD, or perhaps previous recordings from the musician. As you become a "fan", you may start collecting posters, CDs, and other tokens, and attend concerts. When new recordings are released, you are primed to "add the latest" to your collection. Sometimes, the first exposure may be at a concert (e.g., the new band is the warm-up band for another) and you buy the CD there. Sometimes you go to a musical, and buy the CD on impulse as part of expressing your feelings about what you saw and heard. The model of exactly what role familiarity plays in purchasing is very important and is ignored in the simplistic "downloading is bad" theories. "Free music" has always been a factor in demand (remember the dual deck cassette player/recorders?), you just have to figure out how it fits in to the entire picture.
Music that you download at the suggestion of others, or in response to hearing something else by that artist, counts as sampling just like listening on the radio (maybe more so, since you get immediate gratification and your tastes are taken into account by your friends). The importance of radio sampling, and the problems of the cost of "paying" for it, is of great interest to the music industry, as you can see in their writings about consolidation and payola. "Marketing" music through means such as music videos and radio playing is a major cost to the music industry -- "perhaps the most expensive part of the music business today" according to the RIAA.
Some examples of how we could use such a model was suggested by a friend: What is the role of MP3 players, that hold more music than I normally carry? Does an old portable CD player only let me carry just my few "favorites" that I listen to over and over again, and the larger capacity of the MP3 player means I can sample ones I'm just learning about? Does the proliferation of automobile CD players have an effect? Do people load up the car CD holder with 20 of their "favorites" every 6-12 months and just listen to them instead of learning about new artists on the radio?
The role of cell phone usage
There is an effect that I noticed while walking around the streets of New York City, and then again in Toronto, on campuses, and elsewhere. Less and less do you find people walking along, in their own worlds, listening on headphones to personal music devices. More likely than a Walkman or Discman, I see people with cell phones clutched to their ears. Style of dress doesn't matter -- rich or not, working or strolling, they are talking to someone else. Maybe it isn't just music or mass entertainment we want when we "tune out" the world around us, but rather something else to do of our own choosing. And that something else, if we had our druthers, would be to talk to someone we know and like. We don't just want "content" that many other people would enjoy, too. The young people who buy many CDs, as far as I can tell, are not just the asocial people who don't talk to others. "Popular" kids buy a lot of music. This move to more communicating when traveling, and less music listening, is something I understand and have experienced personally.
Maybe there is a drop in music sales that is the result of an increase in cell phone usage. Cell phone ownership (especially among those in the CD-buying ages -- see this report and this USA Today article) has been growing the last few years. In addition, the number of minutes used is going up. According to the CTIA numbers (details on their web site), total billable cellular minutes are up 76% from 2000 to 2001, with an average of 296 minutes per month per subscriber and with 17% more subscribers. In order to drive sales, there continues to be a "war" among cellular carriers to see who can provide the most "unlimited evening and weekend" minutes to talk to friends and family (and thereby get you used to talking on a cell phone when it costs money, too). People only have so many waking hours a day. Extra talking while you're walking will undoubtedly cut down on time when you can listen to music. With 500-1000 minutes a month to talk, that's enough to listen to 10 CDs. If we say that you listen to each CD you buy 20 times (1480 minutes) that means that the avid CD buyer would probably buy 1-6 fewer CDs per year once they start using a cell phone heavily. In addition, talking on the phone while walking or driving cuts down on time to listen to the radio and be exposed to new music. This could be having a huge effect on CD sales. This is in addition to the moving of limited discretionary spending from music to cell phone fees.
The entertainment industry is trying to turn Peer-to-Peer into a bad name. This is wrong. Fax machines are Peer-to-Peer. Telephones are Peer-to-Peer. Email is Peer-to-Peer. Cell phones are Peer-to-Peer. As we see here, maybe the Peer-to-Peer systems they should be complaining about are sold by AT&T Wireless, Verizon, and Voicestream.
There is another thing that I've noticed. Not all giving others copies of music is to avoid payment. People make mixes of songs for other people as gifts. (PCs make this really easy compared to the cassette tape days.) Those songs are sometimes ones that remind them of times together because they are the main ones they listened to over and over again when working, riding in a car, at camp, etc. Those songs come from CDs, often purchased, that one or both parties own. The "gift" is the compilation -- the mix -- not the music, since they already have the music. (That's interesting, because a compilation can be an expressive thing, maybe even worthy of its own copyright protection.) Our use of music is evolving and it isn't just to save money.
Opposite effects that increase CD sales
What effects are there that are increasing CD sales? The one I keep hearing about from people I know who buy many CDs is the learning about new musicians from friends, and sampling their songs through downloads and other means of sharing. Once they find out they like the musicians, they then seek out their CDs for purchase (recent and past) as well as go to their concerts. This is of great importance to the health of the music industry. Another area is buying CDs as gifts. A "real" CD is even more special today, and that makes it an even more special gift. You show you care enough to get the pretty shrink-wrapped copy, not the hand-labeled home-burned one.
Given the slight dip in CD sales despite so many reasons for there to be a much larger drop, it seems that the effect of downloading, burning, and sharing is one of the few bright lights helping the music industry with their most loyal customers. Perhaps the real reason for some of the drop in sales was the shutdown of Napster and other crackdowns by the music industry.
Record companies complain about the consolidation of radio station ownership and the cost of paying off radio stations to play their music so we can listen for "free" and figure out what we'd like to buy. At the same time they are trying to kill a goose that is laying a golden egg by fighting Digital Music Use rather than, as Forrester's Bernoff suggests, understanding and joining it. Worse yet, they are trying to use legislation to hobble computing in general to get what they incorrectly think they need. This is wrong and shortsighted, and will result in many undesirable side effects (for example, see my "Copy Protection Robs The Future" essay). It is bad for them and it is bad for society.
- Dan Bricklin, 9 September 2002
See also: How will the artists get paid?, my essay from April 2003.
Some real research: See "The Effect of File Sharing on Record Sales: An Empirical Analysis" by Oberholzer and Strumpf, March 2004. Observed, carefully measured behavior shows that file sharing does not hurt record sales in the ways claimed by the recording industry, and is probably good for society.
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