How the Impact of the Internet has Affected the Music Industry - Essay Example

How the Impact of the Internet has Affected the Music Industry Business Report Prepared by: Number: August 29, Institution: Section: 6.2.1 Contents How the Impact of the Internet has Affected the Music Industry Introduction 2 Review of Secondary Research 3 First signs of the impact 3 Peer-to-peer networks 3 The business impact on sales and revenue 4 (amounts in USD) 7 (A) 7 Worldwide Music Industry Revenues 7 (B) 7 Worldwide Recorded Music Revenues 7 (C) 7 Worldwide Digital Music Revenues 7 (D) 7 Worldwide Recording Industry Revenues from Online 7 (E) 7 Worldwide Recording Industry Revenues from Physical 7 Structural impact on the music industry 9 Positive impacts 11 Implications for future research and policy 12 Conclusions 14 Bibliography 14 Introduction This study examines how the impact of the Internet has affected the music industry. The precise research question framed is: How has the impact of the Internet affected the music industry? The Internet has had a profound impact in many areas of life but one of the earliest and greatest of the cultural (and business) impacts has been on the music industry (DiMaggio et al, 2001) both positive and negative. This is an important issue because the growth of the Internet and faster Internet connections has been accompanied by an increase in downloading and filesharing. Once a file is in digital form and on the Internet, it can easily end up anywhere in the world. This is the negative impact, and one of the worst affected industries of this problem has been the music industry (Peitz & Waelbroeck, 2005). The Internet has been both a blessing as a great distribution channel, especially for budding artists, but at the same time, it has posed serious problems because money is not flowing into the music industry as it used to. The situation has therefore spawned efforts for greater digital rights management (Hilts, 2003). The major companies in the music industry are Universal, Warner, EMI, BMG, and Sony, and they are all concerned for their very existence. The greatest contributor to the cause of decline in record sales are the more organised filesharing or P2P networks (Liebowitz, 2006; Graham, 2005) because these are responsible for huge volumes of downloads and are difficult to control because content is not stored locally. The music industry has been lobbying for more effective copyright laws; implementing copy-protection mechanisms for example to prevent CD-ripping; promoting awareness campaigns, and has tried to sue both users and providers of downloading services (Bakker, 2004). These measures have been effective to an extent, but they have also resulted in negative publicity and public alienation (ibid). On the other hand, changing attitudes have also affected the music industry. For example, there is now a greater preference for short singles again rather than full-length albums (Dallas Morning News, 2003). However, this study will be confined to the immediate and long-term business impact the Internet has had on the music industry. This study has been undertaken using only secondary research and several studies were examined for the purpose. Review of Secondary Research First signs of the impact The impact of the Internet was first felt when large collections of digital music began to be stored on network servers and websites as this enables anyone with access to the server or website to download the music files (Kusek, 2008). However, this copiable and distributable feature of digital music is also associated with the introduction of the CD in the early 1980s (Kusek, 2008:4), not just the Internet. Nevertheless, one of the consequences of this is that “intellectual property owners lose control of distribution” (Kumik, 2003), so they don’t get paid regardless of the effort, time and cost that may have gone into producing the work. Four related developments have made the whole process even easier and more widespread: the unsecured mp3 file format, broadband connections, CD burning capabilities mentioned above, and cheap data storage devices. The mp3 file format is able to compress file sizes (to 1/12th) while preserving the quality and at low cost; broadband connections allow faster Internet access, CD burning enables the music to be stored on mobile media, and cheap data storage devices allow large music collections to be maintained. Furthermore, these music files can be “copied millions of times without the loss of quality, downloaded without the knowledge of the copyright holder and transmitted around the world instantly over networks” (Sparrow, 2006:2). Peer-to-peer networks The development of peer-to-peer (P2P) networks further eased the process of searching for music files on the Internet. These filesharing programs are designed specifically to locate music and other such content, and in a way that does not rely on accessing a central server. Instead, files remain on individual hard drives and the programs simply facilitate the direct sharing of files. They bypass the record companies because downloaders acquire files without any money flowing to them (Graham, 2005). But “what really scares the music industry is the sheer scale and ease of the piracy allowed by the internet” (Hammersley, 2002) because of lost revenue. To put this in context, according to Kusek & Leonhard (2008), “more files are being downloaded each month across the various networks than are being sold by the music industry on an annual basis”. One of the first such programs was Napster but several music companies joined together and led by the Recording Industry Association of America (RIAA) sued Napster and it no longer exists (Riedel, 2006). Although Napster itself was a non-profit making venture, it was the access to a huge number of files it provided to users and the sheer number of users and filesharing taking place that worried the music companies. Nevertheless, several other filesharing programs have since taken Napster’s place that use technically more sophisticated methods to allow filesharing and at the same time, evade legal complications. These include Kazaa, Limewire, and Acquisition. According to the IFPI Digital Music Report 2009, during the year 2008 in the UK, approximately three million people downloaded unauthorised files; the p2p networks accounted for 80% of all Internet traffic; 95% of music tracks downloaded were done without payment to either the artist or music companies; the amount of loss attributed to filesharing in the UK alone was an estimated £180 million with a predicted cumulative loss of £1.1 billion by 2012, and overall 40 billion music files were unauthorised music files. These statistics spells bad business for the music industry. Consequently, the music companies having been cracking down initially on filesharing service providers as mentioned above, but later also on filesharers themselves. The business impact on sales and revenue The recording industry itself and the RIAA suggests there is a decline in their album sales and blame this on the the P2P networks. On the other hand, it is suggested that filesharing actually increases sales because it popularises music. Michel (2006) investigated this very issue using empirical analysis based on U.S. household data from the Consumer Expenditure Survey between 1999 and 2003 i.e. the impact of Internet filesharing on music sales. The findings were shown to be consistent with other research indicating that filesharing has indeed decreased sales. The study by Michel (2006) showed a decrease of 13% for some categories of music consumers. The relationship between computer ownership and music purchases definitely weakened since filesharing began as this was not the case beforehand. However, this was “concentrated among the heaviest music purchasers”. Furthermore, there was no evidence to suggest that filesharing led to an increase in music purchases. The other researches that showed the same include Zentner (2005), which showed a 14 to 23 percent reduction in the U.S.; Liebowitz (2004), which suggested an even higher decease of 30% in the same population; and Hong (2004), which showed a significant decrease among the 6 to 17 age group due to filesharing. Another study by Peitz & Waelbroeck (2004) presented macro data confirming RIAA’s claim by showing a 20% reduction in music sales worldwide between 1998-2002. However, the report also concluded that “other factors than music downloads on file-sharing networks are likely to be responsible for the decline in music sales ...” as well. According to Krasilovsky et al. (2007), physical sales of recorded music in 2005 were $13.2 billion and (legal) digital sales were $790 million although they tripled a year later, and iPod sales were an estimated $12 billion. The graph below shows the general decline in physical sales and rapid rise in sales of the iPod. Including other portable music players would show even higher figures. It is also noteworthy that before the introduction of the CD in 1983, demand for recorded music was declining, and the development of the CD helped the music industry to grow again (Vogel, 2001). Fig: 1 Sales of retail and digital music, and the iPod, 2000-2005 (projected to 2006) Source: Krasilovsky et al, 2007, p. 9. An updated version of this graph (but confined to the Western European market), shows that the projected decline for 2006 did occur and continued until it reached a low in 2008. Since then there has been a recovery in both the physical and online markets, but particularly in the online market. Fig. 2 Sales in the Western European music market, 2001-2010 Source: oto-online.com In 2007, there were an estimated $2.9 billion in sales of digital music, which was a rise of 40% over the previous year (Schonfeld, 2008). Nevertheless, this was insufficient to offset the overall decline of music sales by 10% to 17.6 billion. The same report however, also mentioned a tenfold increase in the number of legal services available online, and the number of tracks downloaded legally was 1.7 billion, an increase of 53% from the previous year. In comparison, the number of unlicensed tracks is 20 times greater; in the tens of billions. In terms of revenue of the worldwide music industry, according to eMarketer statistics shown in the table below, with one notable exception, revenue from all streams listed have been growing, especially digital music revenue (C). The exception i.e. a decline is revenue has been experienced by the recording industry for physical sales (E). The is more explicit on the graph below the table. Overall then, the music industry is not doing too bad though the growth is expected to slow down, but evidence does show that there has been a negative impact in case E. That is, the overall music business itself is still thriving. It is only in some areas such as CD/DVD sales that have taken the brunt of the impact due to free filesharing on the Internet. Table 1: Worldwide music revenues 2006-2011 (amounts in USD) (A) Worldwide Music Industry Revenues (B) Worldwide Recorded Music Revenues (C) Worldwide Digital Music Revenues (D) Worldwide Recording Industry Revenues from Online (E) Worldwide Recording Industry Revenues from Physical 2006 60.7 36.0 2.9 1.9 33.1 2007 61.5 35.1 4.5 2.8 30.6 2008 62.6 34.6 7.0 4.1 27.5 2009 65.0 35.4 10.7 5.9 24.6 2010 (projected) 66.4 35.1 12.9 6.7 22.2 2011 (projected) 67.6 34.7 14.8 7.5 19.9 Source: eMarketer, 2009 Fig. 3 Trends for worldwide music revenues 2006-2011 Source: Generated from data in table 1 However, Kusek & Leonhard (2008) question this scenario that places the entire blame for the decline on p2p networks, and point out that competition from other forms of entertainment media has also become tougher. They say it is this more than illegal filesharing that is causing the decline of record sales besides other reasons as well. The proportion of income that used to be spent on CDs is now being spent on newer entertainment forms such as DVDs, video games and computer software. Music CDs therefore no longer offer ‘good value’ compared to these other media. The authors also point out that CDs were created to replace the old vinyl records, and the previously high album sales therefore reflected ‘double sales’, which have now stabilised. Added to this are the effects due to the current global recession further showing that the Internet alone is not responsible for the decline in sales. At the end of 2008, Sony Music Entertainment for example, experienced sales decline by 22% compared to a year earlier due to the “accelerated decline in the worldwide physical music market resulting from the worldwide economic slowdown” (Kafka, 2009). Changes in attitudes is also a contributory factor but this is beyond the scope of this study. Structural impact on the music industry The more drastic long-term impact on the music industry is that “organisational structures ... are being torn apart ... And Internet technology is a primary driving force of this restructuring” (Spellman, 2002:4). The very role of ‘middlemen’ in the music industry is also in jeopardy as computer technology and the Internet provides musicians with the ability to create an entire music studio and handle their entire business from production to distribution themselves if they wish to. This takes away the control that record companies were able to exercise before the Internet, so naturally the industry is concerned for its continued existence. Before the restructuring, there were three main segments in the music industry: performance, broadcasting and purchases (Meisel & Sullivan, 2000). They rightly predicted that online music distribution would disrupt this three-income structure and create a new flow of revenue. They highlighted three major effects: bypasses the retailer, leads to illegal distribution and induces internet radio. They characterised the online distribution model as follows: 1. Greater freedom for producers in creating music and consumers in accessing music. Previously, the record companies had control over these. 2. The record companies have been induced to combine their content creation and distribution activities to provide extra services. 3. Existence of sustainable online business models that are integrated with the record companies. They mention the new legal mp3.com, which besides generating revenue through advertising and subscription fees, also sells information to the record companies concerning consumer listening tastes. The impact of the Internet is shown to draw the relationship between artists and consumers closer but at the expense of the record companies. Others have predicted the lessened barrier to entry (Alexander,1994), and pointed out the different shapes of online music distribution and difficulty in determining royalty payments (Vogel, 2001). A more recent study by Lewis et al (2005) on the impact of the Internet on barriers to entry in the music industry noted that the main barrier to entry in the music sector had been “the ownership and protection of artistic content in the supply chain”. They showed that “the Internet is destabilising the supply chain for music by challenging the pre-web role and domination of the music industry supply chain; and by changing the primary entry barrier in the sector from the incumbents exploiting their ownership of copyright to one of trying to protect it”. That is, control of the supply chain was previously in the hands of the record companies along with exclusive rights to the music. They had to bear most of the risk for budding artists, but they also took the greater share of profits from their work (Graham, 2005:353) and charged exorbitant prices. Thus, before the impact of the Internet, these companies not only owned but also exploited the content of music artists. The situation now is that the Internet has reduced the level of investment required for creating and distributing music. The artist is now at centre of the model rather than the record companies, and the Internet is playing a big role in the supply of music as depicted in the figure below (Graham, 2005:353). Fig. 4 New Internet and artist centric model of the music industry Source: Fig. 4 The increasing dominance of the internet, Graham 2005 If the above trends continue, it is likely that the dominant firm model will emerge meaning that there will be an increasing concentration of existing firms in the industry. Positive impacts Although the negative impact of the Internet on the music industry is often highlighted, there are also positive impacts to be considered. While the big record labels are suffering from the impact of piracy and the future for them is bleak, “it looks much more positive for artists and consumers (Graham et al, 2004). The Internet, or the World Wide Web specifically, and various related technologies that utilise this fast expanding communications network, have altogether also helped to popularise music for listeners, and provided more creative and flexible tools and means for musicians to promote themselves. This is fundamentally because a network of this kind collapses distance ... [and the Internet has] opened the door to full-color graphics, CD-quality sound, and real-time video (Spellman, 2002:1). Now, “Music fans are completely awash in music, and digitial music has become the new radio for the Internet generation” (Kusek, 2008:6). The consumption of music statistics show that other than record sales, the publishing, merchandising and distributing of music is doing very well (Kusek, 2008). The advantages in terms of distribution are very clear. The Internet has enabled people to (both legally and illegally) download music from the comfort of their own homes without having to purchase CDs from shops. In other words, the distribution model has changed so record companies need to adapt to this instead of trying to challenge a losing battle. The channels of radio and television continue to exist but the Internet is now the primary channel for marketing and distribution of music, and filesharing will always remain. Personal computers and music creation software have also enabled people to make their own music easily, and this is to the benefit of the industry as a whole because it promotes music listening. The Internet has certainly changed the nature of the music business to the detriment of the record companies to an extent, but it has also created the potential for much greater music creation, enjoyment and use than ever before (Vogel, 2001:171). In their publication ‘The Future of Music: Manifesto for the Digital Music Revolution’, David Kusek and Gerd Leonhard (2008) suggest that music is becoming more of a utility or entertainment service than a product in line with the transformation from analog to digital. They envisage “a future in which music will be like water: ubiquitous and free flowing Implications for future research and policy A common response of music companies has been to attack and crackdown on both filesharing service providers and users. Currently in the UK for example, there are moves to dramatically increase the pace of cracking down following the publication of the Digital Economy Bill this year (Bradshaw, 2009; Barnett, 2009). Moreover, the government has set a target of a 70% reduction in illegal filesharing failing which they propose to take further steps to disconnect filesharers from the Internet altogether (Jackson, 2009), which become a human rights issue. Sweden’s example by tightening copyright laws is seen as promising because it has led to a 18% rise in music sales again (Allen, 2009). A similar experience on sales has occurred in South Korea. However, the harsh approaches are controversial and are only aggravating consumers, and serve only the interests of music companies. Moreover, there is evidence to indicate that “people are migrating away from p2p platforms and increasingly access content via proxy server, encryption, ripping from internet, radio and so on - all of which is undetectable” (In Allen, 2009). This would pose an even greater problem for music companies, which must therefore seek alternative solutions. Apart from suing filesharers and filesharing service providers, other policies of the recording industry include reducing the prices of CDs, permitting paid-for online distributions and setting up their own subscription services. The strategy of Apple and others that have followed suit since Napster’s demise could be the antidote against the filesharing service providers and users. Apple has been promoting legal downloads through its hugely popular and successful online iTunes music store (www.apple.com/itunes) in collaboration with the record labels. Although these legitimate markets cannot compete with the free means of obtaining music, they do provide a means for more conscientious and mature computer users to obtain digitised songs. They also avoid the need for waiting, and the problem of uncertain quality associated with downloading from p2p networks. Illegal downloading may be huge but legitimate digital music sales are also thriving. This shows that a healthy market for legal online distribution exists and is doing well. As of the start of 2009, iTunes had sold an estimated 6 billion songs online (Schonfeld, 2009), and as of 2008, eMusic the second largest music distributor after iTunes had sold 250 million mp3 downloads (Cohen, 2008). On the other hand, while online distributions and subscription services provide for a legitimate means to acquires music, they also inadvertently help to proliferate digitised music files, which can then be copied and redistributed very easily. Therefore, another thrust of the music industry has been to protect content. One failed attempt was SDMI players but the watermarking technology it relied on was broken, and moreover, people cannot be forced to use such players in place of the non-compliant players. Lawmakers are also faced with the same problem of “the sheer pace of development ... [which] presents difficulties because whilst it is recognised that the Internet will continue to advance, one cannot be certain of the direction of the new media industry is heading ...” (Sparrow, 2006:3). Nevertheless, some form of security measures will be necessary to ensure copyright protection (Sherlund, et al, 2000:28) as well as legal controls. The Internet cannot be dismantled. Therefore, to counter the long-term repercussions and survive in the long-term and offset the loss of physical album sales, the business models of recording companies will have to be changed. They could for example take a more active role in a wider range of functions for artists. It has been said that the Internet has rendered the distinction between performance, broadcast and distribution as artificial anyway (Spellman, 2002:1). This way, their overall costs will be reduced and the impact of illegal distribution channels will be dampened. The artists will benefit as well from an integrated service to manage all aspects of their work. It is not really a choice but a necessity because “there is a growing pressure on the music industry to develop a new business model or suffer the consequences” (Graham, 2005:355). Similarly, Curien & Moreau (2005) proposed a model that works under privacy rather than against it. They suggest that “record companies should seek to extend their business frontiers, either by renegotiate music contracts with artists or, if it proves to be impossible, by a downstream vertical integration, especially towards the concert industry”. This wold exploit the main feature of piracy which is its ability to diffuse music at very low cost yet ensure that artists are able to receive their royalties. Features of new business models that are already starting to take shape include centering commerce around ‘music access’, forming partnerships, investing in new talent and supporting artists’ careers, open music sampling. In addition, the report suggests public education campaigns to teach young people how to use the Internet responsibly and raising awareness of legitimate sources of music. (IFPI, 2009) Other suggestions have been as-supported models, streaming subscriptions. Conclusions The Internet has had a profound impact on the music industry but various related technologies rather than the Internet alone is responsible, these being the introduction of the CD, the mp3 file format, CD burning capabilities, broadband connections, etc. but most of all the p2p filesharing programs. The actual impact has been lost sales and revenue due to "sheer scale and ease of the piracy allowed by the internet" (Hammersley, 2002) which does away with money flowing to the music industry. Several studies mentioned confirm the grim reality for the music companies although as Kusek & Leonhard (2008) pointed out, the changing times are also due to increasing competition from alternative entertainments. Furthermore, the current global recession has also impacted upon the music industry but this was not examined in depth. A useful addition to this study could have been the latest Annual Worldwide Music Publishing Industry Report but this is not freely available on the Internet (researchandmarkets.com). Music companies have responded by cracking down on both p2p program owners and filesharers but this is not the way forward in the age of the Internet. Apples strategy has led the way for legal music downloads showing that there is great market potential in digital music. The long-term structural impact on music companies however is more serious and this necessitates complete restructuring of their existing business models. The artist and Internet centric environment is now well established and on the positive side, this is good for both music fans and to an extent artists also. However, if the music companies wish to survive, they must adapt to the changed environment in which music is no longer a product but a utility. Bibliography Alexander, P. J. 1994. 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