pampelmoose: sparks + innovation — sparks + innovation

I’ve finished reading about The Future of The Music Industry and thought it was worth drawing attention to this paper by Koleman Strumpf. It’s a much longer read but it certainly debunks the record industry’s notion that file sharing is harming their business. In fact it says that just the opposite is happening. And the elephant in the room? The industry’s decision to kill the single just as consumers were moving back to it.

Koleman Strumpf, professor of business economics at the University of Kansas Business School whose papers include “The Effect of File Sharing on Record Sales”:

• album sales fell 18 percent between 2000 and 2006, after accounting for paid digital downloads from online stores like iTunes. While these numbers are not good, other industries have experienced similar downturns. For example, new car sales are down 22 percent for U.S. automakers.
• The current situation closely mirrors the post-disco bust in the early 1980s. Specifically, real revenues fell by the same percentage during the years 1979 to 1985 and 1999 to 2006.
• Putting profitability aside for now, what is the explanation for the sales reduction that has occurred? The most obvious culprit is illicit file-sharing on networks such as Napster, KaZaA, eDonkey, and BitTorrent. While linking the two seems tantalizing — file sharing rose to prominence at roughly the same time that record sales started to fall — there is surprisingly little evidence to support the claim that file sharing has significantly hurt record sales. If file sharing hurts record sales, then albums that are more heavily downloaded should experience lower sales than comparable albums that are less downloaded. But, after controlling for the role of popularity, we found that downloads had little effect on album sales.
• There are several other factors that might explain recent sales trends. First, recall the industry’s similar problems in the early 1980s. Then, as now, sales were down as consumers stopped purchasing albums from a previously popular genre (in the ’80s it was disco; now it’s teen-pop). So one explanation is that the industry has failed to find genres that capture the interests of consumers.
• The major record labels have cut large numbers of staff and severed ties with many artists. Such moves are not necessarily bad business choices, but they suggest that less attention should be given to revenues and more to profits.

• Third, recorded music has had trouble competing against other products that vie for consumers’ entertainment spending. Consider home video products like the DVD. It does not seem implausible that a good chunk of the $11 billion rise in spending on home video products since 1999 represents foregone CD sales. (Music industry revenues only fell $2 billion over this period.) Entertainment spending was also likely channeled into cell phones and video games, both of which experienced large sales growth and have been particularly popular with the key teen demographic.
• A fourth and final factor to consider is the rise of paid digital downloads made popular by iTunes. While this model is often described as a competitor of illicit downloading, there is little evidence that file-sharing users also use iTunes (plus genres like classical music, which are largely ignored on file-sharing networks, are very popular on iTunes). More problematic is the likelihood that music consumers who used to purchase whole albums now download only one or two songs, so rather than getting $15 for an album sale, the industry gets two downloads at $2. While there is no direct evidence that cannibalization is occurring, the growing size of paid downloads makes this factor an important one to consider.