Changes in the Music Industry

The music industry, as Johnny Cash would have stated it, was “born to lose, and destined to fail.” Within the last decade, technology has increased at an exponential rate, and the music industry has yet to join this technological revolution. More and more people have become dependent on the internet, thus creating a dilemma concerning the illegal downloading of free music. I do not necessarily agree with illicit downloading, but the music industry is not handling the situation appropriately.
The music industry’s business model has not been able to adapt to the increases in technology and the convenience of the internet. Consumers are, for the most part, attracted to a band after hearing a single hit song from them on the radio. However, they take a risk if the buy this band’s CD because they have never heard any of the other songs on it. This problem has lured many people to convert to the illegal downloading of free music. They can download songs based on preference and have the ability to customize their own library.
In addition, the business model of the music industry is flawed because the prices of compact discs have become standardized. Prices are considered the central economic mechanism of information transmission because they convey information about future risks and future benefits. Therefore, it is difficult for record labels to understand the true preferences of the individual consumer. Likewise, it is difficult for consumers to gauge the risk they endure when making a purchase. Illegal downloads have enabled consumers to erase the risk of obtaining unwanted songs, and through these illegal downloads, music labels can more readily analyze consumer preferences.
Although music labels claim that elicit downloading has been a major factor in the recent decrease in legal music sales, the reality of the situation is that illegal downloads have had an effect “not statistically distinguishable from zero” (Fisher). After analyzing data from the final four months of 2002 in the United States, peer-to-peer downloads have only affected music sales by .7% (Fisher). In the study, 1.75 million song downloads from 680 different albums sold were tracked during that time period (Fisher). The findings were that music sales had dropped about 80 million sales from the previous years, and illicit downloads could only be accounted for no more than 6 million of those lost (Fisher). Therefore, the illegal downloading of free music on peer-to-peer websites does not correlate to a decrease in music sales.
Since illicit downloads have barely any effect on music sales, music labels could use the idea of downloading music as a catalyst to ignite the future of the music industry. Apple’s online music store, iTunes, for example, has allowed users to purchase individual songs from the internet. Since Apple does not own or control any music, it must license the rights to distribute the music to others (Jobs). Although Apple’s business model is more innovative than that of the music industry, it does not allow music labels to analyze consumer preferences accurately due to the standardized price of $.99 cents per song. If the prices of songs fluctuated, consumer preference patterns would be more accurate and more easily evaluated. ITunes is also flawed because songs purchased on it can only be played in the iPod because they do not share any digital rights management (Jobs).
Therefore, the music industry should take advantage of this opportunity and convert their business model into one that coincides with the internet. Research shows that the most popular iPod, which holds 1000 songs, is on average nearly full (Jobs). 22 out of 1000 songs, or 3%, are purchased from iTunes and protected with a DRM (Jobs). Consequently, the other 97% are unprotected and can be played on any music player. Since iPod users are purchasing the majority of their music from outside sources, they are not dependent on iTunes to purchase their music (Jobs). The music industry should alter their business model and fill in this gap.
Illicit downloads have become an alternative to legally purchasing music from music labels. As a result, the music industry has to adapt to the changing technology and build a new business model or alter their current one so that it coincides with the internet. I believe that the transformation of the music industry will not be an easy task, but the opportunity is available.

References:

Fisher, Ken. "Study: P2P effect on legal music sales "not statistically distinguishable from zero." Ars Technica. February 12, 2007. 11 Apr 2007 http://arstechnica.com/news.ars/post/20070212-8813.html.

Jobs, Steve. "Thought on Music." Hot News. February 6, 2007. Apple. 11 Apr 2007 http://www.apple.com/hotnews/thoughtsonmusic/.