Even as the RIAA decries how file sharing robs them of revenues, the music industry is seeing increased profits from digital distribution.
Ever since the rise of Napster in the late 1990s, the recording industry has pointed to piracy as a dire threat to its business model. After years of legal actions and generally irritating their customers, the labels finally figured out how to adapt their business model to respond to changing consumer expectations. Enter the digital music download and subscription services.
Despite the success of the download model, the RIAA has continued to complain about decreasing CD sales and shrinking profits. It is true that consumers are buying fewer CDs. At the same time, digital sales have soared. Including sales of ringtones and revenues from subscription services, digital media now accounts for nearly 9 percent of recording industry revenues and a startling 42.6 percent of total unit shipments.
Looking at the numbers over the past few years, two things stand out. One is the overall decline in sales of physical media (e.g., CDs, CD singles, vinyl, music videos, and DVDs), from 860 million units in 2002 to 749 million last year—almost 13 percent. More importantly, legal downloads have gone from zero to 554 million in two years. Perhaps most telling is that despite a decline of 151 million units of physical media sold since 2002, revenues have only dropped by US$340 million—about 2.7 percent.
Note: 2002-05 CD sales as a percentage of physical media
sales range between 93.3% and 94.2%
Source: Recording Industry Association of America (PDF)
This should be good news for the record companies. Instead, they're using the figures to paint a gloomy picture of declining music sales, continuing to blame evil college students and others sharing music over campus networks as well as file sharers from all walks of life for their problems.
CD sales may be slipping, but paid downloads are growing at a much faster rate than CD sales are declining. Ultimately, that's good for the labels' bottom line since digital music distribution is much less costly than manufacturing and shipping physical media. Download rates should continue to grow, as digital music players become even more popular and consumers continue to embrace digital distribution.
The labels should also forget about CD sales ever recovering, and should stop using that as a metric for measuring piracy or other industry wores. Like it or not, the album's time has come and gone. Sure, artists will continue to release music in album form (and some of those will be worth buying), but consumers are becoming accustomed to cherry picking their favorite tracks. Why buy an entire CD for one or two good songs when you can buy the tracks you want individually?
If the recording industry has its way with the iTunes Music Store and other online music stores and services, prices for downloaded music will start to increase, especially for the most popular tracks. A year ago, that would have been a suicidal move in a nascent market. Now, the market is more mature and consumers have become enamored enough of the business model that it's more likely that only the most price-sensitive music lovers will be turned off.