Did The Recording Industry Really Miss The Opportunity To 'Monetize' Online Music?

Overhype

from the basic-economics-time... dept

There’s been a lot of talk in the last year or so about the fact that the recording industry supposedly “missed an opportunity” to “monetize” online music a decade ago when it failed to come to an agreement on licensing with Napster. The idea was that Napster could have been iTunes, and people would be paying for music. That claim is made, yet again, in a CNN article about the decade since Napster, with a Forrester analyst claiming:

“That four-year lag [between Napster and iTunes] is where the music industry lost the battle,” said Sonal Gandhi, music analyst with Forrester Research. “They lost an opportunity to take consumers’ new behavior and really monetize it in a way that nipped the free music expectation in the bud.”

That implies that if the industry had simply licensed its music online in 1999, rather than 2003, the dollars spent on recorded music would have remained propped up. I don’t buy it. This ignores the fundamental economics of what’s happening in the industry — but, thankfully, some folks are noticing this. Matt Yglesias points out how wrong the claim by Forrester is, by noting that the market for recorded music was due for a correction just based on fundamental economics:

Music industry executives can tell themselves that as long as they want. But under conditions of perfect competition, the price of a song ought to be equal to the marginal cost of distributing a new copy of a song. Which is to say that the marginal cost ought to be $0. That’s not a question of habit, you can look it up in all the leading textbooks. Of course real businesses rarely operate in circumstances of perfect competition, and record companies have a variety of political and legal tools they can deploy to try to protect monopoly rents. But this is hard to do. I think the real story with the iTunes store is that over time competitive pressure has impelled it to largely drop DRM and over time I expect we’ll see that the CPI-adjusted price of songs declines.

Tim Lee, who pointed us to this piece in the first place, tacks on the point that “the economic argument for free music is unrelated to ‘piracy.'” This is, indeed, a key point and one we’ve tried to make in the past, but one that sometimes gets lost in the shuffle. The basic economics of music suggest that it was going to face downward pricing pressure all along. That has little to do with unauthorized access to music or whether or not the major record labels sucked it up and did licensing deals with Napster. It was just where the market was going to head one way or the other — because, over time, more and more people would begin to realize that free music was an excellent promotional tool for other things, and that would drive more business to those other areas. That, in turn, would lead more and more musicians and their business partners to recognize the benefit as well. In fact, we’re seeing that happen today. The fact that unauthorized access to files online may have helped push that realization forward doesn’t change the fact that those pressures were going to come one way or the other.

The recording industry may have missed a chance to slow down the decline in recorded music sales, but it hardly could have kept the numbers as artificially inflated as they used to be.

Separately, the CNN article is incredibly weak in that it makes the mistake of implying that the recording industry is the entire music industry. It completely ignores the fact that the overall music industry has actually been growing as sales of recorded music have dropped. People have just shifted their spending habits, and that likely would have happened whether or not any licensing deal had been worked out in 1999.

Filed Under: business models, economics, monetization, music, napster