I don’t know why I like writing about the music industry so much. I wanted to write a quick response to Marisa’s post, but my response got long so I figured I would post it here and trackback to Marisa, but she doesn’t seem to support trackback, so I guess I’ll just post it here.
I think that Marisa is correct to phrase the question in terms of purchasing habits. Online music may not dissuade her from buying CDs when that is already her habit. She are not the problem. I think the greater concern of the music companies relates to young people who from an early age may have a lot of internet access and not a lot of money to spend on CDs. Many of them have gotten in the habit of simply downloading music and have never bought a CD in their life. In my opinion, that is what the labels are worried about, this idea that music will become something people no longer expect to pay for. And for some reasons, CD sales have been down dramatically over the past few years. Maybe this is because the CDs aren’t very good, but that has never stopped people from buying music in the past. Maybe it is because people are spending times watching DVDs and playing videogames, instead of listening to music. But those trends have been happening for years, and it is unlikely that they would contribute to such a precipitous decline in sales. It is hard to ignore the strong correlation of declining CD sales and the rise of internet music. (In fact, I was in a record store in Durham recently that decided to stop carrying Rock, Pop and Hip-Hop CDs, because they only customers that were reliably buying music any more were the older Jazz and Classical consumers.)
The interesting thing is that over the years labels have been much more interested in letting users sample music online, whether that is in the form of letting them download selected tracks, stream an entire album, or listen to 30-second samples on iTunes. Of course, these are all types of sampling that they can control enough to make sure it is not a substitute for the album. But given that the industry was afraid of anything digital a few years ago; it does represent progress.
Yes, the draconian restrictions on internet radio were a poor idea. This probably represented the intense fear of labels that internet radio stations would be a backdoor for piracy (like tuning into a station that constantly plays ‘Dark Side of the Moon’), as well as record companies need not to undermine the traditional radio they know how to control. This, or course, indicates that the political clout belongs to the major labels selling Backstreet Boys CDs, but that is hardly surprising.
The sampling argument is actually an interesting one. A frequent claim that you hear is that “File sharing is good, because I can sample an entire album and only buy it if I really know I am going to like it, so I don’t end up with a shelf full of CDs that I never listen to”. While this seems logical, it has some interesting economic implications. Suppose that in the pre-Napster days people would buy a CD based on a strong single or review in Spin, and only really love a third of the CDs they acquired. Today they can use sampling to focus in on those good CDs. Even though the consumer will be just as happy, they will spend two-thirds less on CDs, and the record companies costs will only decline by a marginal amount. Record companies are already merging and cutting jobs to control their losses over declining sales, so they could not ignore this continued change in behavior. One could imagine a few possible responses.
They can increase the prices of CDs to compensate for the decline in sales. This is probably the most logical option. Consumers once has partial knowledge of the contents of a CD, and record companies were forced to decrease their price to compensate for this information asymmetry. (For example, if I spent $15 on a CD that I had a one-in-three chance of liking, then I should be willing to spend $45 on a CD that I already know I love.) But this would undermine the incentive of consumers to buy CDs after sampling them online, as well as drive away consumers who do not engage in file-trading. So it is probably impractical.
They could invest in far fewer new artists, recognizing that in order to recoup their investment they will need the number of people who love a CD today to equal the number who had passing interest in it ten years ago. This seems logical but undesirable, as the ability to sample music results in there being less music to choose form.
They could get McSweeny’s to lay out the liner notes, which would be so cool that people wouldn’t mind buying CDs they don’t like. This would be really cool, but somehow I can’t see Universal music putting their fate in the hands of a man named Eggers.
None of these seem very palatable. Maybe the ability to sample will lead people to buy the same number of CDs and just pick better ones, but that doesn’t really alleviate the situation. First of all, people aren’t going to have more time to listen to music, so it seems unlikely that they will need that much. Secondly, in order to compete for such selective consumers, record companies will still need to provide a wider selection of material, which is expensive to produce. (As much as I would love to believe that the world will learn to share my taste for amateurish bands recording of 4-tracks, that seems unlikely.)
The record companies are certainly reacting to music downloading out of fear, which is not unusual when an industry is threatened by technological change. However, this may be more rational than it seems, because in this case the threat of the technology is not to radically improve the industry, but rather to destroy it.