Copyright Enforcement From The Enforcers' Viewpoint

Interesting article.

I do find one flaw in the logic - it says that record sales are just 42% of what they were 10 years ago, and it gives an estimate of 95% of digital music as unpaid. But it doesn't close the loop and tell you how much of the lost 58% in record sales has been replaced by the 5% of digital stuff they're collecting.

And the answer is a lot.

I picked one of the big labels (Warner) and read their annual report - which you can find here.

Last year, their digital revenue grew 10%, and it now accounts for 36% of all recorded music revenue in the US.

Doing a little math, and making two assumptions (that their catalog is representative of the market, and that the numbers in the article are accurate), that means their total income from recordings are actually down 36% over 10 years, not 52%. And if it's true that 95% of digital distribution is unpaid.... well, that says their expectation - that all music gets paid for at the going rate - means Warner believes sales of recorded music should now be 368% of what it was 10 years ago.

And that, to me, defines the problem.

Music that's distributed via CD or vinyl has costs attached to it: production of the fixed media, trucking to the wholesaler and then the retailer, breakage along the way, overhead and profit for all involved, and the write-off of product that didn't sell. Digital distribution replaces all those costs with the cost of bandwidth - a very VERY tiny fraction of the expenses they used to have.

And yet, the pricing of digital music is based on the old model of distribution. The industry feels a fair price is about a buck a tune - which comes to $10-12 per CD, or about what they sold for in the past. But with the much lower cost structure, their profits per tune rise dramatically. I figure their net revenue on a per-tune basis is at least five times higher with digital than with hard copies (and I'm probably being extremely conservative in that guess).

So let's say they cut their costs to 25 cents per tune. Wouldn't a large number of the current 'free riders' decide that the risk of being caught simply isn't worth it, and start buying their downloads? If doing so increased the percentage of paid-for music from 5% to 33%, their total revenue from recordings would rise to 75% of the level they were at 10 years ago - and with lower costs, that's probably a fair deal. That would give them 80% of prior sales on a dollar basis. But it would also give then 105% of prior sales on a SONG basis, and with lower costs of distribution, they'd be swimming in money.

I think one of the major factors of the level of piracy is the fact that the sellers haven't changed their expectations to reflect the cost of production. People know they're being gouged at a buck a pop, so they opt out of paying.

Interesting article. Thanks for posting. :)

Thanks for the article, Ric. And thanks for the in-depth analysis, Noteboat.

I've always had mixed feelings on this issue- like anyone who loves, and makes, music, I WANT to pay for it- I want the folks who make music to make a living so they can keep on making it for me to enjoy.

I also have lived a lot of my adult life in the so called developing world.

This gave me a really unique perspective, I think. In the pre-techno days, it was CD piracy that everyone talked about. In those days, a pirate CD was about a dollar. Sometimes 2 for a dollar. Sometimes 3 for five, if they were popular. At that same time, original CDs were available in some malls...for $25 to $30. The average salary was $340 a month.

When CD producers and distributors raised complaints with the government about enforcement (there was none), they always started with studies estimating how many pirate CDs were sold, then assumed that, in the absence of piracy, all of those CDs would be sold as originals. Ridiculous.

It's just one example.

Personally, I don't hold with stealing. I don't hold with stealing when listeners do it, and I don't hold with stealing when producers do it. But it seems to me that if the producers were willing to offer prices vaguely in line with their costs, rather than in line with their hyper-inflated shareholder projections, a lot of folks who are "stealing" music now would be happy to take them up on it.

Economists say that market value is decided, essentially, by what people are willing to pay. So are the tunes really worth the prices they put on them?

Best,
Ande

You're dead on, Ande. It''s been going on like this for a long time - when I was a kid, they wanted to ban tape recorders, for fear that people would copy music with them. They actually got a tax placed on recording equipment, which was to go into a fund to pay artists for lost revenue.

As far as the market setting the prices, they already do - 5% of the downloaded music is worth it, because it's paid for... 95% isn't worth it, because it's not. And the market is right.

Economists talk about the price equilibrium curve (supply and demand). With music, the cost of supplying a download is very low, so the supply goes way up - which it has... if my figuring is right, the number of song reproductions now is nearly quadruple what it was 10 years ago. And economically, that increase in supply should have led to a reduction in price. And in fact, it has - if only 5% of the downloads are paid for, then the market price of a download is about a nickel, and the market price of all music (including what's still sold on CD) is about 32 cents.

If the record labels recognized that fact, and priced to what the market will actually bear, pirating would be minimized. And once they achieved that, they'd have the resources to go after the remaining pirates more effectively, and earn what they actually should - but right now they're still too busy crying over their 'losses' based on an economic model that doesn't exist anymore.

The article notes that most people are in favor of the artists making money from what they do. But artists are still paid (for the most part) based on the old model - including accounting deductions for 'breakage'. The labels want to reap all the benefits of their lower costs, but I think a lot of people realize that doesn't help the artists much - the labels would get the lion's share.

In my mind, a fair price for digital music is probably somewhere around 20 cents per song. At that level, I think the piracy issues would disappear, and everybody could make money... except for the lawyers.

Wait - could that possibly be a factor? :)

They actually got a tax placed on recording equipment, which was to go into a fund to pay artists for lost revenue.
Currently we have a similar tax: each disc (CD/DVD) or device with memory (hard disks, memory cards, pen-drives, ipods/iphones/etc. and also computers, mobile phones...) has a tax depending on the size of the memory (there are tables). I use huge hard disks and lots of DVD for recording our own images. I pay a tax and the authors receive money for my own work... Moreover, they are considering that I am a pirate simply because I buy gear that can store music or video... Clever people.

You said the magic word: lawyers!

Very interesting, Ricochet!

Another problem is that they're almost certainly not counting independent sales and artists giving their music away.

Most everyone I listen to these days are smaller independent artists. Nearly all of them offer at least a few songs for free download on their websites. I go to their shows and buy trinkets from their sales table which supports them directly and keeps my money out of the useless parasitic hands of folks like Warner and Sony.

Those sales are almost certainly not on the radar of market surveys, and the legality of much of the unpaid for music is being ignored.

Lastly, there is the question of the marketability of the vast majority of produced music out there. One reason record sales may be going down is that people who have the money to spend on music aren't really interested in owning a Katy Perry CD.

Half of the recordings I want are simply not available. They are out of print or were never offered on digital media to begin with. I'd gladly buy them if I could find them. When I occasionally do run across them in a used CD store I pick them up.

And while I don't condone piracy, I fail to see how I'm denying a sale or limiting their revenue when I download a recording I can't purchase in any form.