The advent of the MP3 file format and online file sharing has impacted the record industry in various ways. It is difficult to measure precisely how this technology has affected the global music market, but it is clear that there are many factors involved in the industry's recent slump. The solutions that have been adopted by the world's leading record labels thus far appear to be inadequate. However, a revival in the music industry is possible if these record labels evolve and change the way that they have done business in the past.

History of Music Piracy

The necessity for regulations regarding the widespread broadcast of music first became known in the 1920's when radio stations began playing records. At this time, radio stations were playing records freely, and the artists were not receiving any compensation. By the 1940's, however, Congress had passed laws forcing the radio stations to pay for licenses that would include fees paid to the songwriters and performers [17]. These regulations have lead to radio becoming one of the most successful entertainment media in history.

Blank tapes were invented in the 1960's, and for the first time made it possible to copy music, but the copying process was still very awkward and expensive at this time. However, the advent of cassette tapes soon made it cheap and convenient for people to copy music on their own. Due to the nature of such magnetic media, cassette tapes do not preserve sound quality particularly well, and their quality degenerates with each copy. This helped to control widespread music piracy, but writers and publishers began collecting small dividends on the sale of blank media as compensation [17].

The invention of compact discs, a digital form of media, came in the early 1980's, but they were strictly 'read-only,' and were impossible to copy at that time. However, fifteen years later, in the 1990's, CD burners rapidly became affordable for home use. This has lead to a rapid proliferation in music piracy because compact discs are not subject to the same sound quality issues that affect magnetic media such as cassette tapes.

The next wave in the evolution of music piracy came with the development of programs such as Napster and Kazaa that scour the Internet for MP3 files with the click of a mouse. The global popularity of the Internet has lead to an explosion in music sharing through the MP3 format, which is relatively good at preserving sound quality while keeping file sizes small. The convenience of MP3 encoding and online file sharing has revolutionized the way that many people listen to music.

The MP3 Format

In 1987, researchers at the Fraunhofer Institute in Germany began developing a compressed audio file format with the cooperation of experts at the University of Erlangen [5]. A patent for the MP3 technology, which offers near-CD quality sound at a compression ratio of about ten to one, was granted to the Fraunhofer Institute in 1989. At this time, work began on MP3 playback applications, but they were met with little success. However, the patent holders decided to allow other developers to freely work on MP3 players of their own. This lead to the development of the AMP MP3 Playback Engine by a company known as Advanced Media Products in 1997. A year later, the AMP Engine was incorporated into a program called Winamp that has achieved remarkably widespread use [10].

The IFPI Report on Piracy

The IFPI is an international organization that works closely with the RIAA (its American counterpart) to monitor and control the piracy of music, movies, and software around the world. On October 1st, the IFPI published a report stating that worldwide music sales dropped by 10.9% in the first half of 2003 [8]. They blame this decline mainly on Internet piracy, particularly in the US, Germany, France, and Japan, but there are certainly other factors at play and it is not clear how they arrived at this conclusion. Interestingly, the IFPI reports that DVD music sales have drastically increased in the same time period.

Market Research Reports

A number of market studies have been performed to analyze the sales of music CD's which have been in a slump since the year 2000. A Forrester Research study in 2002 pointed to the fact that more than two thirds of the CD's sold in the US are purchased by people who never or rarely download music themselves, which indicates that file sharers make up a small percentage of CD consumers to begin with [9]. Also in 2002, Ipsos-Reid performed a market study and concluded that 81% of music downloaders are now buying as many or more CD's than they did before the advent of file sharing [9]. These studies indicate that there are other, and perhaps more significant, factors contributing to the decline in CD sales.

Other Factors in Declining Sales

Another slump in the record industry occurred in 1978, which record companies blamed on the advent of cassette tapes, adopting the slogan that "Home taping is killing music" [9]. However, it became clear just a few years later that the problem was not in fact caused by piracy, and that the slump in sales was attributable to the decline in popularity of disco music that consumers had simply grown tired of. Mark Jenkins of MSNBC sees an interesting parallel to the disco music of the 70's and the teen-pop genre that dominates the record industry today. He writes that "teen-pop... is not unlike disco: Both are intellectually underachieving, cookie-cutter styles that have made stars of performers not known primarily for their skills as singers, songwriters, or musicians" [9]. The lack of sales in the CD industry today are perhaps attributable to the proliferation of bland music that lacks the personality and innovation that have made musicians successful in the past.

The lack of sales in the record industry in the late 1970's was also blamed on the advent of video games, which began to earn a place in the entertainment industry themselves. Today, the continued growth of this industry, as well as that of DVD's, is further contributing to the record industry's loss of market share. It seems that consumers today are being distracted by other technologies and are finding less time and money to spend on music CD's.

Today, the music industry is controlled just a few major organizations. The Recording Industry Association of America (RIAA) represents the five record labels that monopolize the music industry: Universal Music, Warner Music, Sony Music, BMG Music, and EMI Group. These record companies leave little room for the individuality and creativity that have characterized successful artists in past decades, and instead attempt to control the market by creating generic pop bands that are designed to achieve mass appeal. Furthermore, the Top 40 radio business is dominated by a single company, Clear Channel, which programs radio stations to encourage these pop bands and to limit independent artists.

These five music companies suffered from some particularly bad publicity last year when they were accused of price-fixing, which artificially inflated CD prices between the years 1995 and 2000. The industry implemented a practice called "minimum-advertised pricing" (MAP), which helped pay for retail advertising in return for guarantees that CD prices would be kept above a certain price [12]. The former chairman of the Federal Trade Commission, Robert Pitofsky, found that consumers had been overcharged by $480 million since 1997 [12]. The music companies in question settled the case by agreeing to pay $67.4 million and to distribute $75.7 million worth of CD's to public and non-profit organizations [12].

Artist's Opinions

Artist opinions regarding MP3 sharing vary widely. Ed O'Brien, guitarist for Radiohead, said in an interview in 2000 that "if a band releases a CD with one good song, then it's over, everyone is going to get the good song through Napster. On the other hand, if the whole CD is good, everyone will want the real object, with the cover and all, the real thing" [16]. Radiohead's last album, "Hail to the Thief," was unexpectedly leaked online a month before the album was released this year. However, the album sold 300,000 copies in its first week, which is more than either of their two previous albums [6], which suggests that MP3's may benefit artists more than their record companies realize.

In an effort to control the illegal recording and selling of live material, Pearl Jam began recording all of their concerts professionally and selling the recordings online for much lower prices than the bootleggers could offer. Furthermore, MP3's from each concert are now made available online the day after the concert, and the band encourages fans to share the songs and to copy and distribute the live CD's freely. This policy has contributed to Pearl Jam's fantastic success as a live act and has helped them to develop a large and well-deserved fan base that will no doubt contribute to album sales when their next record is released.

In the year 2000, Metallica's drummer, Lars Ulrich, helped lead a campaign against the Napster MP3 sharing service, which resulted in it being shut down. At one point in the conflict, Ulrich presented Napster's headquarters with a list of 300,000 people who were allegedly sharing Metallica's songs and demanded that they be banned from using the Napster service [14]. Metallica's campaign against file sharing resulted in considerably bad publicity for the band. This year, in an effort to regain some of its lost fan base, Metallica opted to take advantage of the MP3 format by building a website full of live MP3 recordings and providing an access code with their new album, which is evidence that they are easing their stance on file sharing.

Downloader's Opinions

People who download and listen to copyrighted music usually justify their actions in one of three ways. Firstly, there are those who feel that they should not be penalized for downloading music that is too obscure and difficult to find by conventional means. In these cases there can be no loss in revenue for the artist because there is no opportunity for the music listener to obtain the music through other, legal means that would compensate the artist. Secondly, many music listeners download MP3's to sample music that they are willing to pay for if they find it enjoyable. In this case, MP3's serve as free advertising for albums that a music listener may otherwise overlook. Finally, there are those that are only interested in a couple songs from an album and can't justify paying $15 to purchase the CD when it only has one or two good tracks. This situation can only be described as stealing since it takes advantage of someone else's work and offers them no compensation. However, many of these difficulties may be overcome if the record industry makes some much needed changes to the way it markets music.

Solutions for the Record Industry

First of all, regarding cases where music listeners have no choice but to download an MP3 if they want to hear a song because it is obscure or out of print and unavailable elsewhere, it may be profitable for companies or artists themselves to specialize in obtaining the rights to selling these audio files online. It may be the case that music listeners who admire such obscure artists are willing to compensate them by paying download fees, particularly if the files are difficult to find through other means. In any case, these MP3 downloads are currently not costing the artists or record companies any money because the music in question is simply not available for purchase.

Secondly, record companies should recognize the fact that many music listeners who download MP3's are buying more CD's than ever before. Indeed, the Ipsos-Reid market study that was performed last year found that 81% of MP3 users are buying more albums than they have in the past [9]. This points to other factors in the decline of CD sales.

Finally, by marketing pop music that is designed to achieve a mass but shallow appeal among music listeners, the five major record labels are mass-producing albums with one or two hit songs and creating artists that will not achieve long-term success. For example, Britney Spears' most recent album has only sold half as well as her second did in the year 2001 [2]. Music listeners are less likely to follow the careers of such depthless artists and are more likely to simply download the few songs that they may be interested in. This is clearly a form of theft, but the way the music industry does business highly encourages such behaviour from listeners. Furthermore, this is the reason why bands such as Radiohead, who consistently record music of a high quality, are not the least bit worried about file sharing.

Legal Attacks

Insisting that file sharing is the sole reason for the slump in CD sales, the Recording Industry Association of America (RIAA), which represents the five major record labels, has recently launched a series of legal attacks on alleged MP3 downloaders. In September, the RIAA filed 261 lawsuits against people who were sharing more than one thousand songs each [11]. However, the majority of these cases were settled out of court for amounts ranging from $3000 to $7500 [1]. The RIAA is now offering an amnesty plan called the Clean Slate Program [3], which allows file sharers to avoid future legal action by deleting all of their illegally obtained files and promising to abstain from file sharing in the future.

A legal complaint against the Clean Slate Program was filed in California shortly after this amnesty plan was offered [4]. It turns out that the amnesty plan, which protects former MP3 sharers from being sued by the RIAA, does not offer any protection from legal action by the record labels themselves, or from bands such as Metallica who own their own copyrights. Furthermore, since the amnesty plan is not being offered to people who are already under investigation for illegal file sharing, it serves only as an admission of guilt and in this case can be used against the repentant downloader. An attorney from the Electronic Frontier Foundation, Jason Schultz, says that "A true amnesty would end the threat of lawsuits and make file sharing legal in the minds of the recording industry" [4].

Ironically, the company responsible for the Kazaa file sharing service recently filed a federal lawsuit of their own against some of the major record labels that have allegedly been using unauthorized versions of Kazaa's software to investigate file sharers. Sharman Networks Ltd., which owns the rights to the Kazaa software, argues that combating piracy while using their software violates the terms that are agreed to by all users on their network. Sharman has also claimed that certain entertainment companies are in violation of antitrust laws for indiscriminately stopping the distribution of authorized music as well [13].

Technical Solutions

Record companies can change the way they do business by offering to sell MP3's online. However, certain technological hurdles must be overcome. Amnesia, a small dot-com company from Australia has been working with EMI to create a new system that allows downloaders to securely pay for music online and prevents audio files from being played on other computers. Managing director Iain McDonald of Amnesia feels that the music industry needs to change the way it does business and says that "CDs haven't reinvented themselves. Companies still put out crappy four-page [cover] booklets... Consumers are paying top dollar for not much" [15]. Until now, people who downloaded MP3's never had the option to pay for their downloads even if they were willing to pay for such a convenience.

Companies such as iTunes have seen growing popularity in the sales of downloadable audio files. However, it is exceedingly difficult for such companies to achieve profitability in the short term, owing to high costs that need to be paid to record labels and publishers. Furthermore, these companies are burdened with bandwidth costs and marketing expenses as well. However, profits are expected in the long term as consumer awareness reaches a level where companies will no longer have to budget large sums of money for advertising [7]. Additionally, it is hoped that distributors may renegotiate their contracts to alleviate the high costs that are currently being paid to the record labels. In the meantime, companies such as iTunes can act as so-called 'loss leaders,' using the popularity of their online stores to cross-sell related merchandise. Indeed, iTunes, owned by Apple, confirms that "It's [their] strategy to use the iTunes Music Store to sell iPods [Apple's audio player]" [7].

Conclusion

Although the RIAA claims that illegal file sharing has resulted in the downfall of the record industry, there are a number of factors that are likely playing a larger role. Consumers are finding decreasing value in the albums that the major record companies are releasing, while CD sales are being kept artificially high. The record companies are attacking file sharers and generating bad publicity when they should be focussing on new business models and giving better value to the consumer.

It has become increasingly popular for artists to include a DVD with their CD's as a bonus to paying customers. This is a good example of how the record companies can give the consumer something extra that they cannot conveniently download from the Internet. The record companies could also benefit by redesigning CD packaging by offering more cover artwork and other bonuses that would be collectible and awkward to transfer online.

Finally, it is time that the record companies change the generic pop music that has been generated to achieve mass but shallow appeal and begin subsidizing bands that will generate loyal fan bases that will support the artists in their long-term endeavours. Furthermore, the record companies need to realize that it is often beneficial when someone shares an MP3 file and creates five new fans that will attend concerts and buy merchandise even if they don't all purchase the CD. Ultimately, the RIAA needs to stop trying to penalize downloaders, and instead needs to focus on new business models and innovative ways to give consumers what they deserve.

Works Cited

[1] Bridis, Ted. "Music group files 80 more lawsuits against downloaders." October 30, 2003. Retrieved on December 2, 2003 from: http://www.usatoday.com/tech/news/2003-10-30-riaa-80-more_x.htm

[2] "Britney Spears Album Debuts at No. 1." n.d. Retrieved on December 2, 2003 from: http://metromix.chicagotribune.com/news/celebrity/sns-ap-people-britney-spears,0,4113234.story?coll=mmx-celebrity_heds

[3] "Clean Slate Program" n.d. Retrieved on December 2, 2003 from: http://www.musicunited.org/cleanSlateDesc.pdf

[4] Dean, Katie. "Lawsuit Attacks RIAA Amnestry Plan." September 10, 2003. Retrieved on December 2, 2003 from: http://www.wired.com/news/digiwood/0,1412,60376,00.html

[5] "Fraunhofer IIS." n.d. Retrieved on December 2, 2003 from: http://www.iis.fraunhofer.de/

[6] "'Hail to the Thief': Radiohead sales unaffected by spread of illegal advance copies." June 18, 2003. Retrieved on December 2, 2003 from: http://www.zeropaid.com/news/articles/auto/06182003a.php

[7] Hellweg, Eric. "Digital Music's Path to Profitability." November 25, 2003. Retrieved on December 2, 2003 from: http://money.cnn.com/2003/11/25/technology/techinvestor/hellweg/

[8] "IFPI - Global Sales of Recorded Music Down 10.9% in the First Half of 2003." October 1, 2003. Retrieved on December 2, 2003 from: http://www.ifpi.org/site-content/press/20031001.html

[9] Jenkins, Mark. "Hit Charade: The Industry's Self-Inflicted Wounds." August 20, 2002. Retrieved on December 2, 2003 from: http://slate.msn.com/?id=2069732

[10] Jones, Christopher. "MP3 Overview." July 27, 2000. Retrieved on December 2, 2003 from: http://hotwired.lycos.com/webmonkey/00/31/index3a.html

[11] La Monica, Paul R. "Music Industry Sues Swappers." September 8, 2003. Retrieved on December 2, 2003 from: http://money.cnn.com/2003/09/08/technology/riaa_suits/

[12] Lieberman, David. "States Settle CD Price-Fixing Case." September 30, 2002. Retrieved on December 2, 2003 from: http://www.usatoday.com/life/music/news/2002-09-30-cd-settlement_x.htm

[13] "Makers of Kazaa Suing Record Labels." September 24, 2003. Retrieved on December 2, 2003 from: http://edition.cnn.com/2003/TECH/biztech/09/24/kazaa.sues.ap/index.html

[14] Musgrove, Mike. "Metallica's MP3 Conversion." June 5, 2003. Retrieved on December 2, 2003 from: http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A14848-2003Jun4¬Found=true

[15] Pearce, James. "Record Companies Get Amnesia Over Piracy." February 25, 2003. Retrieved on December 2, 2003 from: http://www.zdnet.com.au/newstech/ebusiness/story/0,2000048590,20272331,00.htm

[16] "Radiohead Interview." Rock & Folk Magazine. June 2002. Retrieved on December 2, 2003 from: http://www.followmearound.com/press/072.html

[17] Wicknick, Darcie-Nicole. "Music Biz Advice." n.d. Retrieved on December 2, 2003 from: http://www.musicbizadvice.com/feature_home.htm