Recent news headlines might tempt us to believe that the music industry has turned the corner. That it has sorted out digital distribution, sales are on the up and that all is well with the world once more. But two new pieces of research demonstrate underlying forces that give a very different picture. We reprint these findings in two other articles in this section: the generation that won't buy music and MP3 turn off.
This research suggests that the UK music industry is simply enjoying a cyclical resurgence right now. The record companies are doing what they do well; finding, recording and marketing talent. But this is all micro economic activity. The digitisation of the planet is a macro economic force, and the issues raised in the research papers are based on these macro forces. If we are to cope with them, then we need to openly debate them.
As a sector, we are not very good at this. And nowhere is this more evident than in the piracy debate. The general view is that piracy is a key driver for the industry’s woes. But what if we took a step back and analysed what piracy really is? It’s not new, so what can we learn from how others have tackled it?
Let’s digress for a second.
The murder rate in the UK in 1900 was 10 people in every million. It’s now about 14 in every million. Most murders are domestic, rather than acts of revenge and robbery. As a society we have come to accept this level of murder. It’s actually too much economic effort to stop your ‘Mrs’ from killing you for squeezing the toothpaste in the middle.
In other words, laws don’t stop crimes in themselves. To make a law work requires an economic commitment in detection and punishment to reduce crime to an acceptable level.
How can that help us understand piracy? To begin with it tells us that if law doesn’t stop murder, it won’t stop copyright theft.
So combating piracy is about getting the pricing of the product - and the physical/legal protection of that product - down to a level that makes piracy tolerable. It’s worth remembering that if you have a product that nobody wants to pirate, then you have a product that nobody wants.
A lesson from history, now. In 1784, William Pitt the Younger had the same problem with tea smuggling. The duties were high and there was much rhetoric about a moral duty to pay. Pitt tackled this by reducing the import duty on tea from 119% to 12.5%. The smuggling of tea ended overnight, revenues from duties rose, and he neatly illustrated that smuggling (or piracy) was more to do with economics than morality.
Pitt changed the risk reward ratio of smuggling at a stroke; he reduced the margins on smuggling to a level where the return was not worth the risk of a long spell in Botany Bay. Music could learn from this.
What happened recently in the music industry was that it expected consumers to crave CDs and to buy its music, but if you wanted the product online, this was an inconvenience to the record companies and so they failed to supply. To be fair the industry was stuck between two irresolvable contradictory economic models: physical versus virtual.
So the consumer did what you would expect, and said, ‘if you are not going to supply legally, I will sort out my own supply illegally.’
Failure to supply always creates problems. This is the major lesson of the piracy debate. And as new platforms arrive, no matter how hard, we must license them and ensure they can get music at a price that rewards everyone in the creative chain - creators, recorders, marketers - and the platforms themselves. Dithering for 10 years in the face of new distribution is not an option, and this will be particularly true as the new mobile services rise to compete with iTunes.
Eight years of failing to provide a legitimate online supply educated vast numbers of young people that they could get music for free, and this failure to supply has helped trash the value of recorded music.
The problem facing the music industry was that the only economic way to reduce piracy was to supply legally online, and at a much lower price.
Some of the music industry violently responds to the accusation that they got their pricing model wrong with, ‘yes but there was no price we could charge which could compete with the free proposition of piracy’.
This is of course a cri de coeur and not an argument, as all theft, ie burglary, is about helping oneself to goods for free. Of course we must take action against organised crime and individuals who are flagrantly flouting rights, but we need to understand that the issue is not competing with free; the issue - as Pitt demonstrated - is adjusting the risk reward ratio so that the risk is not worthwhile.
In a nutshell, piracy is about pricing, and the economic effort you are prepared to make in law enforcement and digital rights management, to support that pricing.
If you fail to supply on a technology that’s convenient to the consumer, then no amount of lectures on the morality of copyright theft is going to help you, as the ghastly truth may be that online piracy is nature’s way of saying that you are too reliant on the business models of historic technology. The rising tide of piracy was telling the sector that we were doing something wrong. That’s an unpalatable message for any industry to hear.
The current answers to online piracy - iTunes, Napster, Real - are all offering music at much lower prices. The challenge is either effective digital rights protection that can drive up the prices or we accept our pricing fate and strive hard to preserve these values. That means the industry needs more strategic deals that build value for music and less ‘pile ‘em high sell ‘em cheap’ deals that just achieve this years bonus.
While music releases natural opioids in the brain, the demand for it will never diminish. But those that supply music successfully will be those that have adapted their cost base to fit with a digital world. It is a world that should create more wealth for music albeit spread over a wider range of players. It is a world where your consumers will bypass you if you don’t serve them well. We may say that is piracy. They may say they are just a macro economic force voting with their feet.
Adam Singer is group CEO of the MCPS-PRS Alliance