Tag Archives: Piracy

Gollum and the music business

Gollum

 Part 2: Radio Versus Records

Thanks to our friend Thomas Edison, you can still listen to the first (1878) recording of music here. It took another ten years for Emile Berliner to invent the record, the first mass produced music disk.

Music was the first media to move to the cloud in 1906 with Reginald’s Fessenden’s rendition of “O Holy Night” to ships at sea off the coast of Massachusetts. It took another 16 years for the first radio commercial to air, on WEAF in New York City.

Initially the record industry fought radio, but a symbiotic relationship between radio and recorded music was worked out within a few years. Record labels use airplay to generate sales; radio stations use music to sell advertising.

If music is free on the radio, why do we buy it? Radio only gives us a free taste of a song. If we want to own that song we have to buy it. While music under our complete control costs $.99 a song on iTunes, music under radio station control costs us a mere one cent (of advertising). (see previous post)

Just as Free-to-Play games stimulate demand by offering tantalizing, but limited access to a variety of virtual goods and powers, radio stimulates demand by offering tantalizing, but limited access to a variety of music.  The behavioral economics is the same. Temporarily possessing a song (or magic ring) then losing it triggers loss aversion, a powerful motivator, as Gollum learned to his regret.

The power of radio to stimulate demand for music purchases (through loss aversion) wasn’t obvious to the music industry when radio first blared onto the music scene.  Indeed the bliss of radio’s unlimited free music (and the Great Depression) blasted record sales for fifteen years.

Impact Of Radio On The Record Industry

For 67 years, from 1933 until 2000, radio and recorded music grew up together. By 2000, music’s high water mark, the USA recorded music was a $16B business and radio $20B. Over the next ten years, painless CD ripping and burning, low-cost Internet connectivity,  easy legal and illegal file sharing services, and open MP3 players, cut recorded music revenues in half.

001_H_music_rev_raw

Meanwhile radio held steady (until recently – see next post)

Radio_Revenue_Trends-97-06

Radio, a primarily free (or more precisely ad-based) medium, is immune to piracy (but not other threats). Recorded music is not. If recorded music sales kept pace with overall growth of the economy (as it had the previous 67 years) then they would have reached $24B in 2013*. However they shrunk to $6B. This is a $18B per year loss to piracy (just in the USA).

* The US economy has doubled since 1997, and recorded music sales in 1997 were $12B (see graph above).

The Volume of Music Acquired Without Payment

Some bloggers defend pirates with surveys showing that pirates buy more music than non-pirates. That defense suffers from the standard correlation versus causation problem. Those who most wish to acquire music do so, legally and illegally. That correlation does not prove that more piracy sells more music. Where radio songs trigger loss aversion, pirated songs do not. In fact pirated songs are essentially indistinguishable from purchased songs, which makes policing (or even remembering they are pirated) difficult.

Perhaps the most elegant defender of piracy is The American Assembly from Columbia University. They rely on absurd data. They claim (on the following graph) that the average American:

  • From age ~11 to ~25 buys ~70 songs/$70 worth of music a year, reaching 1000 songs/$1000 music collections by age ~25.  (That’s triple what our expected purchases are).
  • Then at age 30, the average American reverses his behavior and starts throwing away 39 songs/$39 worth of music a year. [Since we actually buy 20 songs/$20* worth of recorded music a year, the only way to lose 19** songs a year while buying 20 is to throw out 39 songs each year!]

Music-file-collections

* Americans (300 million music consumers) buy $6.22B worth of songs each year.  That’s $20 of music purchases a year, or 20 songs a year @ $1/song.
** 1044 legal songs at age ~25 down to 376 legal songs by age ~70. That’s a loss of 668 songs in 35 years, or 19 songs thrown out every year for 35 years straight.

This is absurd. Americans buy music at a fairly steady rate throughout their first fifty years, those over forty-five becoming more prominent each year while those under thirty slowly disappear.

Music Sales by Customer Age

Data from https://www.riaa.com/keystatistics.php?content_selector=%20Music-Consumer-Profile 2011 Profile

Music’s sales disaster is no mystery. It’s caused by easy, safe and ad-supported piracy.

Radio drives hunger for music, but it may have doomed the recorded music industry. Why? We expect free music in the air. If you are reading this you probably think … what’s wrong with some more free music? If music is free on my radio, why not on my iPhone?

While the US Government could, as it does with digital audio recorders, simply tax any device capable of playing music a few dollars to compensate for piracy, this is not on the table. Taxes sound scary and we don’t care. What happens to the recorded music industry is someone else’s problem, not ours. [A classic example of Tragedy of the commons.] Our magical thinking about music economics coupled with our endless hunger for free music is pushing the recorded music industry into the crack of doom.

[Next post. Of course music won’t disappear like Gollum or his ring. What will happen?]

Unlike recorded music’s fall in 2000, radio has kept up the economy (until recently…)

Media Share of US Advertising