- Statement from the International Federation of the Phonographic Industry (4/11/09)
The trials and tribulations of the music industry over the last decade are well documented; a $40 billion industry in the late-90’s which should go down to somewhere around $23 billion this year. If you read most of the headlines over this time period, including the recent statement above from the IFPI, you would think that piracy is the major reason for this drop; in reality this is far from the truth.
This is obviously an unpopular point for someone working within the music industry to be making. As someone who has had a front row seat to the decline of the music business over the last decade, as well as the many mistakes we have made to help bring on this decline, it is extremely frustrating to hear that the blame should all fall on those who pirate music around the world. I do not in anyway condone someone “stealing” music. I wholeheartedly believe that artists, writers, producers and music labels should be properly compensated for their work. However, to turn a blind eye to the real causes of this market decline is a cowardly way to push the blame away from industry leaders who in fact should be held responsible for where we find ourselves today.
Let’s look at some facts:
According to the IFPI, the value of pirated music in 1996 (before P2P/filesharing was even really talked about) was about $5.1 billion. Massive amounts of pirated CDs in China, Eastern Europe, Russia, etc. In 2007, depending on your source (RIAA, IFPI, IPI), that global value was a very comparable $4.2 - $6.4 billion.
Now that is no doubt a significant number, but to blame piracy for a 43% loss in market value over the last 10 years would suggest that the effect of piracy had risen dramatically. This is simply not the case. Piracy has a similar effect on the music industry as it did before the rise of the Internet, and we as an industry work today with a threat similar to the one we dealt with when we were bringing in $40 billion annually.
So how else could the industry have lost so much value in such a short amount of time? To this, I offer a few other factors that we have experienced which are worth keeping in mind. I have little data to quantify the individual effect each one has had on the overall industry, but I suggest in aggregate this effect is substantial; much more substantial than the effect piracy has had on its own.
1. CD Replacement Cycle ends: The compact disc was introduced in 1982. By 1995, the platform shift (people replacing their cassette tape collection with the same titles on CD) had peaked. This replacement cycle, in addition to the fat margins the CD once commanded, was a significant engine for the unprecedented rise in retail sales between 1982 and 1995. Digital has not provided anywhere near the same effect.
2. Channel shifts + SKU Reduction: Over the last eight years or so we have seen a significant channel shift away from music specialist stores (Virgin, Trans World) with average SKUs ranging from 20k to 100k+ toward Mass Merchandisers and Supermarkets (Wal-Mart, Tesco, Borders) with average SKUs from 10k and lower. Fewer titles available, satisfy fewer consumers, and put more pressure on select titles to sell huge amounts of copies; something that has happened less and less over the last decade. Additionally, catalogue titles (older products which require minimal marginal costs to release) have been the hardest hit and thus led to an even greater effect on the labels’ margins.
3. Price Decline: Between 2002 and 2007 the average retail price for a full-length album in the U.S. declined 15.3%. In the U.K., this decline was 24.6%. This drop is especially rampant in the UK market where supermarkets and other mass merchandisers have looked at music as a footfall generator and loss-leader, thus driving their own margins downs as well as those of the labels who sell to them.
4. Unbundling: When the music industry decided to allow a computer company to take control of its product and unbundle its’ format of choice, it drastically altered its overall economic model. As digital grows, revenues drop more and more as people choose to purchase individual tracks at 79p each rather than full albums (label costs have not dropped in line at all). Recent analysis of unbundling for new releases has shown that the value of the average mixed bundle (physical album + digital album + digital singles) has dropped by almost a third because of the unbundling effect. If digital continues to supplant physical in the way we think it will, we may look back one day at unbundling as the most detrimental decision the music industry has ever made.
5. Ignorance and Poor Leadership: Ok, so you can’t really quantify this one, but the way industry executives have handled changes over the last 15 years has no doubt had a negative effect on the overall business. Call it ignorance, stubbornness or a misguided compensation system, but there has been much too much focus on legal aggression and physical format promotion amid drastic change. Not to say that CD sales weren’t, and still aren’t VERY important and that exercising legal action against piracy isn’t either. However, when one’s annual bonus is measured entirely by sales of a traditional format rather than an emerging one, irresponsible decisions are going to be made. These decisions have no doubt played a role in where the industry finds itself today.
