A precipitous drop in CD sales

According to an article in the March 21st edition of the Wall Street Journal, sales of compact discs for the first three months of 2007 have experienced a precipitous drop of 20% versus the same period only a year ago. Need I state the obvious, but that drop has NOT been offset by online sales of digital music.

According to an article in the March 21st edition of the Wall Street Journal, sales of compact discs for the first three months of 2007 have experienced a precipitous drop of 20% versus the same period only a year ago. Need I state the obvious, but that drop has NOT been offset by online sales of digital music. Quoting from the article:

The music industry has been banking on the rise of digital music to compensate for inevitable drops in sales of CDs. Apple's 2003 launch of its iTunes Store was greeted as a new day in music retailing, one that would allow fans to conveniently and quickly snap up large amounts of music from limitless virtual shelves.

It hasn't worked out that way -- at least so far. Digital sales of individual songs this year have risen 54% from a year earlier to 173.4 million, according to Nielsen SoundScan. But that's nowhere near enough to offset the 20% decline from a year ago in CD sales to 81.5 million units. Overall, sales of all music -- digital and physical -- are down 10% this year. And even including sales of ringtones, subscription services and other "ancillary" goods, sales are still down 9%, according to one estimate; 

On a radio show Sunday night where they discussed the issue, people had various theories. One was that music companies were simply producing bad music, and hence, customers weren't buying it.

That's an annoyingly pretentious argument. The boomer generation, in other words, had great bands like the Beatles, Led Zeppelin and Pink Floyd, and all the current generation have is the artistic equivalent of Christina Aguilera and Pussycat Dolls from which rational music lovers will flee like chimney sparrows from a burning house. Clearly, they haven't heard of Radiohead, or Muse, or Placebo, or Kaskade, or any of the hundreds of current bands whose absence would make my musical life very uninteresting. It's worth noting that Frank Sinatra would have rejected claims of boomer music superiority as well, but for different reasons. He had famously bad things to say about rock music in general.

Memories fade, I guess. Those great classic bands certainly sold many albums (though the Beatles were a unique phenomenon), but don't forget that they shared the airwaves with plenty of mostly forgotten dross.

I also don't accept that the drop is due to difficulties finding CDs. People point to the collapse of smaller CD shops, and even once-mighty Tower Records, as making music consumers' lives more difficult.  Lets not forget, however, the sheer number of places that still sell CDs (Virgin Megastore, Borders, Barnes & Noble, Wal-Mart, Best-Buy, Target, etc.), or the fact that buying CDs online isn't just easy to do (and often cheaper to boot), but gives you a clearer idea of what you are buying due to the near universal ability to listen to each track.

It's pretty clear that there is one reason - and one reason only - that music revenues are down, and that is because of the ease with which pirated music can be acquired.

The increase in the use of pirated music is driven by a cultural shift in the way we consume music. Digital music players are nearly ubiquitous these days. They are so pervasive that I regularly see senior citizens walking around Hollywood with the telltale white iPod earbuds poking out of their jackets.

A threshold has been crossed. For many, the most natural format for music has become digital files often stored inside a portable music player. This shift creates a larger potential market for files distributed through "trading" networks. If you don't know how to acquire this music yourself, most people know someone who can.

Of course, whether there is anything that can be done about this given the extreme difficulties of preventing piracy using digital techniques (DRM) is an open question. The Zune might DRM-protect the music stored inside of it (to enable the "music beaming" feature), but that doesn't mean I can't just insert a jack plug into the headphone port and connect the other end to the "line in" slot on a computer, recording what is output into any format I want, sans-DRM.

DRM, in other words, has holes of necessity, as it needs to be playable so that humans can hear it. As all it takes is one person to remove those protections and post that music onto a trading network, stopping piracy using DRM becomes hard to do.

Reading comments relating to the WSJ article on sites across the web, few questioned that piracy had a role in the sales drop. Most proposed "solutions," however, fell into the following two categories.

  1. Music companies just need to get used to less revenue. The ability to heavily monetize recorded music was a historic anomally that is about to be rectified
  2. Musicians need to concentrate on live shows as a source of revenue

I chuckled on the second one. I'm sure many musicians would find the prospect of spending even more time on the road an event worthy of upping the dosage of illegal substances they are ingesting on a regular basis. I rank that up there alongside FSF fans who insist that I should given away free software and confine myself to making revenue exclusively through consulting.

But hey, plenty of people think they have as much a right to download illegal music as they do to breath air. Others have simply never thought about it. Whatever the rationalizations, just as musicians will have to "adjust" to the reality of lower revenues in the digital music age, consumers will have to get used to something as well, namely:

Fewer bands

At the Getty Museum in Los Angeles, there are several rooms full of paintings from Dutch artists who lived during the period when the Netherlands was the hub of a trading empire that stretched to the far east. Rembrandt is a famous example of this period. What inspired this efflorescence of artistic expression? Quite simply, customers with bank accounts filled with guilders earned from that trading empire, and thus, with spare change to throw at paintings by local artists.

America has a surprising number of companies that produce and/or broadcast content for television. What drives this variety? Revenue opportunities, both from the existence of a large and unified market for English-language (and American) content and the revenue generated through advertisements. Many European countries have strange laws which disallow much in the way of commercials, thus depriving the industry of that ad-based revenue boost. As for the unified market angle, the leading non-American content producers can be found in India (home of Bollywood and 1 billion potential viewers) and spanish-speaking Latin America (Mexico is turning into quite the source of entertainment content).

Everyone seems to agree that a) music companies will make less money, and b) musicians will have to work harder for their cash. That has ramifications. Just as a low oil price leads to less efforts to find new sources and / or invest in alternatives, lower revenue (and higher costs, from a personal standpoint) will lead to fewer musicians.

Yes, people will still play music for the love of the art. I wrote articles for ZDNet for free for many years (I like to write). Lots of developers will program for free on open source projects.

Let's not pretend, however, that less revenue won't affect the number of musicians. That's basic demand curve economics.

I've argued in favor of DRM in the past because I liked the fact that regular joes working out of their garage might distribute their recorded works online and generate revenue from them. Unfortunately, it doesn't take much concerted effort to work around most DRM schemes, which means the only thing preventing people from diving into the pirated music seas is a moral sense of propriety. As is clearly evident, that isn't working.

Other markets, such as the one for proprietary software, face similar issues. Software has an easier time managing piracy, however, as businesses are often its largest customer.  Businesses are an easier audit target. Not so individual consumers, which puts the RIAA in a position of trying to strain the ocean with a collander.