In the first decade of the 21st century, the rise of computers as the primary means to record, distribute, store, and play music caused widespread economic changes in the music industry, fundamentally changing the relationships between artists, record companies, promoters, retail music stores, the technology industry, and consumers. The rise of digital music consumption options contributed to a few fundamental changes in consumption. First the decline of album sales. With the A la carte sales models increasing in popularity, consumers no longer download entire albums but rather choose single songs.
The initial stage (from approximately 1998 to 2001) of the digital music revolution was the emergence of peer-to-peer (P2P) networks that allowed the free exchange of music files (such as Kazaa and Napster). By 2001, the cost of hard drive space had dropped to a level that allowed pocket-sized computers to store large libraries of music. The iPod and iTunes system for music storage and playback became immensely popular, and many consumers began to transfer their physical recording media (such as CDs) onto computer hard drives. The iTunes Music Store offered legal downloads beginning in 2003, and competitors soon followed, offering a variety of online music services, such as internet radio. Digital music distribution was aided by the widespread acceptance of broadband in the middle of the decade. At the same time, recording software (such as Avid’s Pro Tools) began to be used almost exclusively to make records, rendering expensive multitrack tape machines (such as the 1967 Studer) almost obsolete.
The chief economic impact of these changes was a dramatic decline in revenues from recorded music. In the 21st century, consumers spent far less money on recorded music than they had in 1990s, in all formats. Total revenues for CDs, vinyl, cassettes and digital downloads in the U.S. dropped from a high of $14.6 billion in 1999 to $9 billion in 2008.
The popularity of internet music distribution has increased and by 2007 more units were sold over the internet than in any other form. However, as The Economist reported, “paid digital downloads grew rapidly, but did not begin to make up for the loss of revenue from CDs.” The 2000s period stands in stark contrast from the “CD boom” of 1984-1995, when profit margins averaged above 30% and industry executives were notorious for their high profile, even frivolous spending.
The major record labels consistently failed to heed warnings or to support any measures that embraced the change in technology. In the early years of the decade, the industry fought illegal file sharing, successfully shutting down Napster in 2001 and threatening thousands of individuals with legal action. This failed to slow the decline in revenue and was a public relations disaster. Some academic studies have even suggested that downloads were not the true cause of the decline.
The turmoil in the industry changed the balance of power among all the various players. The major music-only stores such as Tower Records (which once wielded considerable influence in the industry) went bankrupt, replaced by box stores (such as Wal-Mart and Best Buy). Recording artists began to rely primarily on live performances and merchandise for their income, which in turn made them more dependent on music promoters such as Live Nation (which dominates tour promotion and owns a large number of music venues.) In order to benefit from all of an artist’s income streams, record companies began to rely on the “360 deal”, a new business relationship pioneered by Robbie Williams and EMI in 2007. At the other extreme, record companies also used simple manufacturing and distribution deals, which gives a higher percentage to the artist, but does not cover the expense of marketing and promotion. Many newer artists no longer see any kind of “record deal” as an integral part of their business plan at all. Inexpensive recording hardware and software made it possible to create high quality music in a bedroom and distribute it over the internet to a worldwide audience. This, in turn, caused problems for recording studios, record producers and audio engineers: the Los Angeles Times reported that, by 2009, as many as half of the recording facilities in that city had failed. Consumers benefited enormously from the ease with which music can be shared from computer to computer, whether over the internet or by the exchange of physical CDs. This has given consumers unparalleled choice in music consumption and has opened up performers to niche markets to which they previously had little access. According to a Nielsen and Billboard report, in 2012 digital music sales topped the physical sale of music.
Napster was an online music file sharing service created by Shawn Fanning while he was attending Northeastern University in Boston and operating between June 1999 and July 2001. Its technology allowed people to easily copy and distribute MP3 files among each other, bypassing the established market for such songs and thus leading to the music industry’s accusations of massive copyright violations.
The first peer-to-peer case was A&M Records v. Napster, 239 F.3d 1004 (9th Cir. 2001). The court found that Napster was contributory liable for the copyright infringement of its end-users because it “knowingly encourages and assists the infringement of plaintiffs’ copyrights.” Although the original service was shut down by court order, it paved the way for larger decentralized peer-to-peer file-distribution programs such as Kazaa, Morpheus, Grokster, iMesh, and Limewire, which have been much harder to control because they practice more technically and legally creative approaches.
A number of studies have found that file sharing has a negative impact on record sales. Examples of such studies include three papers published in the April 2006 issue of the Journal of Law and Economics (Liebowitz, Rob and Waldfogel, Zentner). Alejandro Zentner notes in another paper published in 2005, that music sales have globally dropped from approximately $38 billion in 1999 to $32 billion in 2003, and that this downward trend coincides with the advent of Napster in June 1999. Using aggregate data Stan J. Liebowitz argues in a series of papers (2005, 2012) that file sharing had a significant negative impact on record sales.
In March 2007 the Wall Street Journal found that CD sales have dropped 20 percent in one year, which the Wall Street Journal interpreted as the latest sign of the shift in the way people acquire their music. BigChampagne LLC has reported that around one billion songs a month are being traded on illegal file-sharing networks. As a result of this decline in CD sales, a significant amount of record stores are going out of business and “…making it harder for consumers to find and purchase older titles in stores.” On 19 December 2008, the Wall Street Journal reported the following:
After years of suing thousands of people for allegedly stealing music via the Internet, the recording industry is set to drop its legal assault as it searches for more effective ways to combat online music piracy.The decision represents an abrupt shift of strategy for the industry, which has opened legal proceedings against about 35,000 people since 2003. Critics say the legal offensive ultimately did little to stem the tide of illegally downloaded music. And it created a public-relations disaster for the industry, whose lawsuits targeted, among others, several single mothers, a dead person and a 13-year-old girl. Instead, the Recording Industry Association of America said it plans to try an approach that relies on the cooperation of Internet-service providers.
With the explosion of formats and the creation of legitimate digital content, the IFPI observed that three main business models have risen to dominance. They are a-la-carte, subscription service, and advertisement-based.
A-la-carte is a service that sells individual songs, typically for $0.99 and now $1.29. They are known to consumers as “Download Stores”. The leading provider is iTunes Store (Apple Inc.), who surpassed Wal-Mart to become the US’s largest music retailer in April 2008. Sector leaders include:
Many hundreds more stores operate worldwide, often prominent only in particular countries or specialist genres. A third kind of operator never retails directly to the public, instead offering branded whitelabel stores and portals for organisations including bricks-and-mortar music stores, mobile telephony operators and ISPs.
Some services which initially only offered streaming of tracks now also offer a-la-carte downloads, either through third parties (e.g. Spotify) or fully integrated (Deezer, Juno Digital, Rhapsody etc.).
In 2009 Rolling Stone reported a price war between iTunes and Amazon MP3. Bill Carr, vice president of digital media for Amazon.com mentioned the following of digital music “one of the great benefits of the digital business versus the CD business is that we can experiment with price changes for an hour, a day or however long we like, with no impact on inventory”.
A subscription service offers the consumer unlimited downloads for a monthly fee. This approach, according to the Open Music Model, is theorized to maximize revenues in the long run. The sector leader is Napster, which costs $12.95/month and offers 6 million downloads and now offers a $5 a month program. Napster’s net revenue for the quarter ending on 30 June 2008 was $30.3 million. Sector leaders include:
Advertisement-based services offer music free of charge to the consumer, while funding is derived from advertisement. The model is widespread as seen by the success of AOL Music, Yahoo! Music and YouTube (multimedia provider). Many of these services are internet radio stations, as they offer continuous streaming music, while others are not continuously streaming. Many of these services offer multimedia or additional services. For example, MySpace(owned by Fox Interactive Media) offers social-networking as its flagship service. comScore reports the top 10 in internet radio viewership in the United States:
Other sector players:
See also List of Internet radio stations
YouTube (owned by Google Inc.) is the premier site for finding music videos for both independent bands and mainstream bands that have released their music on CD or digitally, while also being useful for finding rare songs. YouTube is a multimedia provider, so it is difficult to say how much entertainment it has provided to music consumers, however it did provide about one-third of all 11 billion online video views in the US in the month of April 2008.
The site is also testing three new landing pages dedicated to the popular categories of news, movies, and music. Each page will be populated with the most popular content on the site related to that category. Some have even hailed YouTube as being the “digital successor to MTV” as they seem to be positioning themselves in that manner. Currently, they have mixed relations with labels as evidenced by their icy relationship with Warner Music Group but more optimistic relationship with Universal Music.
MySpace (owned by Fox Interactive Media) is also a key player and Rolling Stone reports that it hosts more than 70 million users monthly and that “visitors to the site can hear both Bob Dylan’s or The White Stripes’ entire catalogue”. Unlike many services, MySpace has been successful in making copyright deals with the RIAA’s “Big Four”, which is Sony BMG, Warner Music Group, Universal Music and EMI, in September 2008. In January 2009, MySpace made partnerships with the following independent labels: Nettwerk, INgrooves, Iris Distribution, RoyaltyShare, and Wind-up Entertainment. In March 2009, CNET News reported that there are more than 5 million bands with music on the streaming-and-discovery music service, and more than 100 million playlists have been created.
Pandora Internet Radio is distinctive from both YouTube and MySpace in that it offers consumers continuously streaming media rather than non-continuous music, which makes it highly similar to terrestrial radio or television. However, it can be contrasted with radio in that it offers music recommendation. YouTube is similar to Pandora in that it also offers recommendation, but is distinct in that content is user-generated.
A new type of service that has also become popular is sites that allow consumers to pay what they wish or pay by advertising on social networking sites. Sites like Noisetrade.com and comeandlive.com are examples of sites that sponsor artists and allow users to download music in exchange for advertising for the artist. Music is essentially free to users essentially costing only the time it takes to post information about the artist downloaded on Facebook, Twitter, or email. Another example was the release of the most recent Radiohead album In Rainbows in which users could download the album and name their own price. The idea of pay what you want music consumption is new, but catching on with users and growing.
This trend has broader implications in the use of formats. It has been a trend in music, television, movies, and print. The Recording Industry Association of America (RIAA) reported data on the music industry’s sales by format over the ten-year period from 1998 until 2007. The data in the table below is from the 2007 report.
Format Market share
Note: These figures represent data collected only from RIAA member labels, which constitutes only a portion of total online music exchanged.
Statistical analysis suggests the large-scale change in distribution:
In 2008, physical album sales fell 20 percent to 362.6 million from 450.5 million, while digital album sales rose 32 percent to a record 65.8 million units.
The advent of digital media has led to the sudden creation of many new music formats available to the average consumer. In 2003 there were less than 10 formats available, but by 2007 there were over 100. Today a single artist release can be packaged in multiple formats including video downloads, ringtones or mobile full tracks. As the International Federation of the Phonographic Industry (IFPI) notes:
Five years ago music distribution formats were numbered in single figures – today, they number in the hundreds…In the digital era, record companies are licensing music across a multitude of platforms, in scores of different formats and with hundreds of different partners.
Rise of MP3 players, which are consumer electronics devices that stores, organizes and plays audio files. Some DAPs (digital audio players) are also referred to as portable media players as they have image-viewing and/or video-playing support. The first mass-produced DAP was created in 1997 by SaeHan Information Systems, which domestically sold its “MPMan” player in the middle of 1998. In October 2001, Apple Computer (now known as Apple Inc.) unveiled the first generation iPod, the 5 GB hard drive based DAP with a 1.8″ Toshiba drive. With the development of a minimalistic user interface and a smaller form factor, the iPod was initially notable within users of the Macintosh community. In July 2002, Apple introduced the second generation update to the iPod. It was compatible with Windows computers through Musicmatch Jukebox (now known as Y!Music Musicmatch Jukebox). The iPod series, which grew to include microdrive and flash-based players, has become the market leader in DAPs.
The 21st century saw the birth of 3G enabled mobile phones, which enables network operators to offer users a wider range of more advanced services while achieving greater network capacity through improved spectral efficiency.
The key advantage of 3G enabled phones over MP3 players is their greater web integration. This enables users to readily access a far larger quantity of songs than MP3 player users can. For an MP3 player, songs must be stored before the user leaves their computer, but with 3G enabled phones the device is not separated from the source. It is projected that revenue from mobile media and entertainment (MME) services in the US will more than double during the next five years.