How the music industry has dealt with and responded to the issue of the illegal downloading of music

1. Introduction

The music industry’s main component is the recorded music industry, which produces and distributes music primarily through compact discs (CDs), MP3s and long playing vinyl records. While Vinyl LPs were created at the end of the 19th century and CDs have been around since the 1980s, the new millennium and the advent of World Wide Web brought a revolution in the music industry. In fact, in the early 2000s, Napster, a peer-to-peer file sharing service, marked the moment “the music was set free”, as Tom Lamont from The Guardian called it. Musical content became easily available, but the Recording Industry Association of America (RIAA) classified the Internet service as a proper virus, and suited its 18,000 users. Still, what was initiated could not be stopped, and the digital revolution continued. Illegal downloading has since remained one of the main problems in the music industry, to the point that it is considered the enemy of record labels.

Indeed, it threatens their main business model. If before a customer, in order to listen to a certain song, had to purchase the whole album on a CD, now the individual can simply log into a computer, find a copycat website of Napster and download that specific song at almost no cost. For several years, the industry kept losing money ($12.5B by 2012) and shrinking, because its business model was not sustainable anymore. In fact, record labels and artists used to overprice CDs and look at them as their main revenue stream, but the spread of World Wide Web and the ideas of Shawn Fanning and Sean Parker, the developers of Napster, democratised the means of consuming music. Therefore, the percentage of profit from concert tickets and merchandise has grown, but a new alternative business model has risen: streaming.

Even though at a first sight streaming platforms can seem new competitors, with a deeper analysis it can be understood how, in fact, they complement the record label’s work and act similarly to radio stations. What is more, streaming has presented a new revenue stream that does not ran out like CDs sales, because every time a song is played it generates new money for the industry. Thus, Spotify and Apple iTunes and other streaming platforms constitute the innovative products coming from the crisis of illegal downloading, and even though it is possible in the long run that they will completely replace sales of physical records, they represent a steady and trustworthy model for keeping the music industry alive.

2. Record labels

Record labels were those who suffered the most from the issue of illegal downloading of music. As an emblematic example, the annual US music revenues went from $14.6B in 1999 to $6.3B in 2009. Per Sundin, the head of Universal Music’s Nordic operation in the 2000s, told The Guardian that that was <<a truly terrible time> and that his wife was ashamed of his profession, because, in order to cut costs, he had to fire more than 250 people. According to the RIAA, 71,000 jobs were lost between the debut of Napster and 2012. Apart from the major laid-off, record labels decided to focus on established artists rather than to invest in new talents, treated as risks, especially if not from a mainstream genre. In a decade, the music industry was on the verge of collapsing.

Nonetheless, it managed to adapt and drastically changed, not only financially speaking, but also culturally. Guy Hands, a private equity manager who worked for EMI in 2007, recalls that he was surprised about the amount of money that was spent on “fruit and flowers”, until he found out that they were code names for drugs and sex workers. While in the past this kind of expenses were not unusual for a record label, when the crisis hit they were abruptly cut down, and the music industry had to reinvent its image with “family friendly” artists like Adele and Michael Bublé. This fact caused other problems, in primis that singers and musicians playing more obscure or alternative genres had to struggle even more to reach a wide audience, and oftentimes did not receive the funds to start the process at all.

This is why the music industry has also experienced the introduction of new independent record labels that aim at taking the reins back from “the big three”: Universal Music Group, Sonic Music Entertainment and Warner Music Group. Usually record labels justify retaining the rights of the music produced by them with the investments they undertake for finding and developing new artists. On the other hand, for many years this system has been questioned and more and more artists are taking control of the distribution channels of their music, e.g. Radiohead and Oasis. Furthermore, a new start-up called Kobalt has changed the rules of the game. This company positions itself not as a record label, but instead as an independent rights management and publishing business, offering consulting services to those artists who want to keep track of their audience.

Figure 1. Digital and physical revenue market share of the largest record companies worldwide from 2012 to 2016

3. Artists

Napster and the issue of the illegal downloading of music was a turning point for artists. In particular, new artists, in order to make the public aware of their existence, had to rely on recording labels for promoting themselves through paths of less resistance, such as ringtones and jingles. This caused more and more singers and musicians to have less decision-making power, to the point that they began antagonising the record companies and transparency became the real issue for them. In 2017, however, the song changed and streaming music revenues surpassed income from the sale of traditional formats and gave new hope for a rebirth of the music industry. While for many years businesses tried to “play it safe” and invest only in artists that were already known to the public and could be included into pop and its subgenres, now niche artists such as Nordic cloud rappers and South American reggaeton musicians are experiencing a boom.

However, even the most famous musicians were affected, because not only they received less and less advances before the release of a recording, but they also missed the royalty on illegally download songs, since not even the record labels got any compensation from. The American rapper Eminem, who has a net worth of $190M, stated that he <<worked hard and anybody could just throw a computer up and download his music for free, killing the whole purpose of making music>>.

Nonetheless, even in streaming, the artist does not receive much money: the latest survey by Digital Music News reports that Apple Music pays $0.00783 and Spotify pays $0.00397 every time a song is played. But the most famous artists will always receive bigger royalties, just as in the CD era. However, the business model has had one major difference: if before customer paid only once for the music by purchasing a CD and the revenue can dry up, now the artists receive a little amount of money every time a song is played, and some of the more well-known artists from before this era have millions of listeners without realising new music and, in fact, without doing anything. Other artists, in addition, have learnt to exploit the system. In order to appear in different playlists and appeal to different segments, Ed Sheeran made seven new versions of the hit “Shape of You”, spacing from acoustic to dance remixes. Some artists, such as Thom Yorke, Adele and Beyoncé, revolted by withholding their releases from streaming platforms either temporarily or indefinitely, but smaller artists still do not have a say when it comes to choosing whether their music goes on the service or not.

4. Audience

As mentioned before, the way music is produced and distributed has been transformed by the digital age, but consumers have also been impacted by this change. When Napster was developed, it was seen by the general public as the much-needed alternative from the $30 CDs, as people started burning the physical memories of the past age. During its peak time, 57M users had adopted Napster as their preferred method of consuming music and, by the time it was shut down, a multitude of substitutes such as LimeWire had populated the market. That was the time when CDs were burned and not even government and institutions were able to control and restrict sharing music illegally.

Most people downloaded music illegally because they did not consider it a crime, since nobody was being hurt, in their opinion, and they had a major shock when they got sued by the RIAA. Indeed, the RIAA did so to make a statement to detain more people from downloading music for free. Yet, the double-edged sword of the WWW is that it is impossible to stop and remove the content shared on the web. This is where streaming platform, such as Spotify and Apple iTunes, found the business opportunity that created the new way music is experienced by customers. Playing a mixed playlist based on an emotion or “mood” and shuffling different genres were options not available before, but those became the tools for the survival of less known artists. It is noteworthy, though, that most people play their songs because they come up automatically on the chosen playlist and do not search directly for them or remember their name. On the other side, this fact means that artists should not focus on embodying a cultural trait of a geographical market such as the UK or the US, but rather on coming up with a sound that can be a soundtrack for the daily activities of exercising, studying or falling asleep.

It is also interesting to see that, even though nowadays most people use streaming services such as Spotify and Pandora to get new music, there is still a loyal customer base that buys CDs of famous artists for the materialist joy of “owning” them, similarly to antique books. However, CDs are not as charming as vinyl LPs or as personalised as cassettes, so it will become increasingly more difficult to sell them to a wide audience.

5. Conclusion

The biggest crisis in the music industry can be arguably considered that of the illegal downloading of music, because it shook its basic business model from the fundaments. However, the digital revolution offered many opportunities as well, in particular for artists and customers. Singers and musicians, as the creators of original content, are now in charge of the creative process and, with the help of independent record labels and start-ups like Kobalt, are receiving the rights of their products. Moreover, new artists have received exposure through streaming platforms and geographical borders are losing importance to the emotion the music evokes. Furthermore, the audience can enjoy music at a fraction of the cost it had to pay before, as well as it can pick one or two songs from an album instead of listening to all of them.

Nevertheless, as in every crisis, some had to bear its negative aspects, and in this case, they were the record labels. For example, today there are only three of the four big labels that dominated the 1980s-1990s, and EMI Group Limited was divided between the other companies. This can be considered a real example of the New Trade Theory, which states that there is only a certain amount of profit that can be made into an industry. Even the other three are fighting to remain profitable and relevant, by spending for external consulting and the next big star.

In spite of that, the musical scenario is becoming more attentive to the artists and, instead of stopping the digital consume of music, some smaller companies have embraced the technologies and are looking for ways to keep track of where the songs are played, which of them are the most successful and how to anticipate trends. In sum, the industry responded to a challenge that could have posed the end of it by finding new business models, such as streaming, but it still needs to adapt and it is clear that the giants are penalised by their size and their bureaucracy against more agile, customer-oriented start-ups like Kobalt.

6. Reference list

An overview of the recorded music industry- market structure, major players & technological changes. (August 5, 2010). The Music Business Network. Retrieved from https://themusicbusinessnetwork.wordpress.com/2010/05/08/an-overview-of-the-recorded-music-industry-market-structure-major-players-technological-changes/ Accessed June 3, 2018

Lamont, T. (February 23, 2013). Napster: the day the music was set free. The Guardian. Retrieved from https://www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing Accessed June 3, 2018

Reever, C. (March 1, 2011). 14 Artists Who Launched Their own Labels. Paste Magazine. Retrieved from https://www.pastemagazine.com/blogs/lists/2011/03/kid-cudi-recently-announced-that.html Accessed June 3, 2018

Siddall, J. (April 5, 2018). The Effects of Illegal Downloading On The Music Industry. Marshall Music. Retrieved from https://www.marshallmusic.co.za/effects-illegal-downloading-music-industry/ Accessed June 3, 2018

The music industry and digital revolution (July 19, 2016). The Economist. Retrieved from https://www.youtube.com/watch?time_continue=3&v=aqz3DaisBz8 Accessed June 3, 2018

What is an MP3? (October 10, 2012). BBC. Retrieved from http://www.bbc.co.uk/webwise/guides/about-mp3s Accessed June 3, 2018

Wolfon, S. (April 24, 2018). ‘We’ve got more money swirling around’: how streaming saved the music industry. The Guardian. Retrieved from https://www.theguardian.com/music/2018/apr/24/weve-got-more-money-swirling-around-how-streaming-saved-the-music-industry Accessed June 3, 2018