How Legal Downloads Are Killing Music Revenue

artist: Misc date: 03/01/2011 category: industry news

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We've all heard about how the music industry took a big financial hit since the likes of Napster offered free music downloads to the masses. But while it's easy to presume illegal downloading was the problem, there's another detrimental factor that has gone entirely unconsidered - legal downloads. Following an analysis at Business Insider, could it be that legal downloads have had just as detrimental an effect on the industry? Let's take a look: In this inflation-adjusted chart of US music revenue since 1973, there's a clear correlation between illegal music sharing and reduced revenue. Once cassette players offered a record button by the late 1970s, revenue shoots down, and there's a similar effect in 2000 when Napster went viral. No surprises there. You'd be forgiven for assuming illegal downloads have been pushing down the digital income too. Perhaps it has been suppressing the format, though I would suggest many mainstream users opted for the convenience of iTunes rather than browse torrent sites which are relatively chaotic. But there's something more here. This chart divides total music revenue between formats:
You see, until 2009, music revenue mostly came from album sales. It's no different to selling a multi-pack product in a supermarket; it's more sales in one hit for the retailer, and the profit scales up. If you consider that a raw CD and it's packaging costs the same whether it's going to hold a single track or a full album, it's undoubtedly going to earn a label more because 12 tracks can command a much higher price than a single. This chart shows the album's revenue dominance. Bear in mind the chart stops at 2009, and we in 2011 would have a very different chart with new services like Spotify to consider:
Another easy presumption here would be how mobile revenue must be growing since everyone started getting smartphones. But it turns out it's just those profit-heavy album sales that shooting down:
While illegal downloading gave revenue the same obvious hit we saw in the first chart, it looks like consumers are buying the singles they wanted rather than the album that would otherwise come with it. It might be legal, but it's not as profitable. Could anyone have foreseen that the convenience and flexibility of an iTunes purchase would be just another nail in the US recording industry? Legal downloads were supposed to be a solution, but instead they've cornered consumers into buying habits that leave the industry short of revenue, which makes it harder for labels to pass on their profits. Apple and their customers might be happy with this arrangement, but the real losers here are the musicians - again. By Tom Davenport
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