Pop Didn’t Eat Itself: Why Piracy Didn’t Destroy the Music Industry

It’s a jolting figure: the US music industry is making less than half of what it made at its 1999 peak of $14.4 billion. It currently makes about $6.3 billion. Why did it drop so fast? Piracy, right?

Wrong. First of all, a fun little fact: that $6.3 billion figure is only album sales. Not ringtones, not licensing rights, not merchandise sales, none of that is included. Why don’t they include that? Because then you’d know they’re still making between $9 and $10 billion.

This kind of finagling of the facts is nothing more than par for the course for the last ten years. What’s brought the music industry down was not pirates, although Napster helped in a way. It was nothing more or less than the culmination of some painful economic karma that was richly deserved, and one company, Apple, seeing a weakness in an entire industry and striking like a cobra.

Don’t get us wrong, piracy is a problem in the sense that yeah, if somebody downloads a track instead of paying for it, the record companies are losing money. But as you’ll see, piracy is an amorphous problem in that it’s easier to pin the blame on than to accept that just maybe, they had all of this coming, and it reveals the current litigation for what it is: a very public and brutal hissy fit.

But first we need to understand why piracy is amorphous, and how that $14.4 billion figure came into existence.

Piracy: Impossible to Track, So Let’s Make Some Stuff Up

If you want to know how ridiculous, heck, stupid, the music industry is when it comes to piracy, look no further than the fact they literally demanded more money than exists on the planet Earth in damages in a recent case against LimeWire. But more interesting were the precedents the judge used in the case.

Accurate data on piracy is pretty much impossible to find — we’ve got no idea who downloads what, unless a tracking file is specifically introduced. But one case used as a precedent, Arista Records vs. Usenet.com, found 878 downloads. The Limewire case was over 11,000 “infringing” works, but the exact number of downloads isn’t really public knowledge.

What is possible to find is proof that the RIAA statements about actual monies lost and downloads are worthless. To say there’s been a lot of spin is understating the case; for example, in 2003, when the music industry was still making over $10 billion on album sales, they tried to pass off shipping fewer units as a loss. It’s widely accepted that the RIAA and the MPAA cannot be trusted for anything resembling accurate statistics on piracy or losses — not that this prevents them from making things up.

However, all of this turns on one crucial assumption: a song pirated is a sale lost.

Therein lies the problem. This isn’t to say people don’t pirate music — of course they do. But it’s not safe to assume that they would otherwise buy the song, especially since there are other, much stronger economic factors. Which brings us back to the era of AOL and Y2K panic.

Buying Music Like It’s 1999

To understand why the music industry choked so badly in the 2000s, all you really have to do is look at the ’90s. First of all, the music industry’s growth was unsustainable no matter how you slice it. Even if Shawn Fanning had decided to do something else with his life, if the iPod had never been invented, and digital music remained science fiction, the record industry still would have seen a precipitous drop. The ’90s music boom wasn’t because of some magic moment, it was for a fairly basic reason: people were replacing their tapes and records with CDs.

Secondly, the music industry had a death grip on the process, and everybody knew a lot of it involved breaking the law. For example, part of those profits, it later turned out, were due to a price-fixing scheme. But it goes deeper than that: the major labels had a level of control over radio, a key marketing tool, that had endured for years, and had similar control over MTV.

And albums were profit machines. A single sold from a buck to $3. An album sold, at minimum, for $15 in 1999. The record industry actually has royalty structures in place that pay more if you deliver above a certain number of songs on an album. It was in their best interest to keep hit songs off of singles and push albums instead. And, of course, once a song dropped off the singles charts, it could be locked in “Best Of” albums for eternity.

So, this is how it worked, in 1999: everybody was replacing their music collections with CDs being purchased at prices kept artificially inflated, and buying new music they were only exposed to by a tightly controlled marketing apparatus.

Enter the MP3.

Napster Ascendant…Except Not

Here’s the first crack in the argument that piracy was or is the main threat to the music industry: in 2001, after Napster had been shut down and its clones and imitators were scampering across the land, the music industry posted a terrifyingly bad profit of…$13.7 billion. Run the numbers and it actually made more per album than in 1999. It’s especially impressive when you realize the country was in the middle of a nasty recession.

To understand why this is, exactly, it’s worth looking at Napster as a phenomenon. Napster got a lot of coverage by old media as a huge threat, but realistically speaking, it wasn’t. It was a fad among college kids and teenagers that pretty rapidly died off, especially when it was shut down in 2001. Why?

Broadband. In 2001, only 10% of people had broadband, and most of them were students living in college dorms. It’s an important fact because, without broadband, music downloads become, well, a massive pain in the ass. Go ahead, download a 5MB file over a 56k connection. Of course Napster didn’t make a dent in the larger media sphere. It couldn’t.

This isn’t to downplay Napster as an achievement, or a game changer, because the key thing Napster introduced was the idea that if you wanted one song, you didn’t have to buy the album. It also highlighted, to one company, that the music industry had no understanding of digital distribution and was, essentially, ripe for the picking, but we’re getting ahead of ourselves. These two things are key — the music industry was complaining that “these damn kids expect music for free!” Instead they should have been worried about those damn kids realizing they didn’t have to buy an entire album.

But could other P2P sites cause a dent? After all, put a chart of broadband penetration next to music industry profits, and you see music profits drop as broadband penetration rises.

Until you look closely, and notice the real drop kicked in 2003.

Gee, what happened in 2003?

Crushed by the iPod

The iTunes Store opened. Here we find the real problem for the music labels: Apple owns and completely controls the biggest record store on Earth, and it doesn’t care about selling albums. The introduction and rapid utter obscurity of “Cocktail,” iTunes’ would-be album seller, pretty much says all you need to know. It definitely doesn’t need the labels’ help selling music. In fact, Apple was happy to help aggressively put record store chains out of business and force the labels to become dependent on them. The real story of music isn’t piracy — it’s how one company realized it could break an entire industry to its will, and actually did it.

Record labels were kind of baffled by the success of the iPod, but had managed to swallow their own hype about the dangers of piracy enough that they were happy to commit to an iTunes Store. Finally, a legal option! All those pirates we’ve been insisting exist will have to pay a buck a song!

Instead what happened — which Apple, by the way, knew it would — is that as more houses got iPods and broadband, people like, say, the dads of teenagers who own iPods took a look at the iTunes Store, decided they liked this “not paying $15 for an album I’m only going to listen to three songs on” thing, and got their own iPod.

This was when album sales entered what one supposes could be called “free fall,” but for labels, the real problem has been the death of the chain record store. Independent record stores and major labels have had an antagonistic relationship at best over the last several decades, but look no further than the ongoing death of Trans World Entertainment, currently the last major chain music retailer standing, for proof that the labels are essentially dependent on two companies, Apple and Amazon, that are happy to force them to accept smaller and smaller cuts of the pie every year.

More damaging is the control the major labels lost over the marketing process. A look at Amazon’s top albums in sales is instructive, if anecdotal — as of this writing, the best-selling album in Amazon’s MP3 Store is Ben Folds Five’s “Whatever and Ever Amen,” which came out nearly fifteen years ago. Number five, “Sigh No More” by Mumford and Sons, has been on the Top 100 for nearly two years. Equally instructive: the price. Want to get on the Top 100 on Amazon? Keep it under $10. $5 and lower and you’re golden.

Singles, meanwhile, are far more radio-driven, but there’s a mismatch between singles and album sales — a hot radio single just can’t drive album sales. This is true even in CDs: Amazon’s big CD hit right now is that young and dynamic hipster, Tony Bennett.

And that’s the root of the problem: the music industry is broken. It clings to a broken model because that’s all it has, and it’s terrified of change. There are valid reasons — there’s no business that likes a declining profit forecast. But part of it is simply denial. After all, if they can convince themselves that eventually, financially ruining random citizens and passing copyright laws that damage basic freedoms and computer security will reverse their fortunes, they’ll keep doing it.

So how do we stop it?

Simple, really: stop buying their products. After all, frivolous lawsuits are expensive, and they can’t make you shell out $15 like they used to. Maybe, after even singles stop selling millions, they’ll get the message.

Although we doubt it.