I’m with the Broadband: The Economic Impact of  Broadband Internet Access on the Music Industry
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I’m with the Broadband: The Economic Impact of Broadband Internet Access on the Music Industry

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Despite its illegal origins, by 2005 digital music distribution and online file sharing – in concert with the growth of broadband Internet access – revolutionized the music industry. Musicians, ...

Despite its illegal origins, by 2005 digital music distribution and online file sharing – in concert with the growth of broadband Internet access – revolutionized the music industry. Musicians, consumers and record companies are now fully beginning to grasp the greatness of this popular new paradigm. This paper explores the origins of P2P systems, investigates their effects on the music industry and surveys the future of this brave new world of music production, promotion and distribution.

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I’m with the Broadband: The Economic Impact of  Broadband Internet Access on the Music Industry I’m with the Broadband: The Economic Impact of Broadband Internet Access on the Music Industry Document Transcript

  • © Matthew A. Gilbert, MBA Page 1 of 6 I’m with the Broadband: The Economic Impact of Broadband Internet Access on the Music Industry Matthew A. Gilbert, MBA MatthewAGilbert.com mttglbrt@gmail.com (661) 513-3370 Abstract Despite its illegal origins, by 2005 digital music distribution and online file sharing – in concert with the growth of broadband Internet access – revolutionized the music industry. Musicians, consumers and record companies are now fully beginning to grasp the greatness of this popular new paradigm. This paper explores the origins of P2P systems, investigates their effects on the music industry and surveys the future of this brave new world of music production, promotion and distribution. I. I Want My MP3! When Napster launched in 1999, it fundamentally changed the way by which people obtained music (Zentner, 2003). Leveraging a peer-to-peer platform (“P2P”) Napster directly connected two or more computers, enabling them to share files and resources (Jacover, 2002). Offering increased speed, unparalleled selection and unequaled affordability (it was free) Napster simplified and centralized the process by which MP3 files could be exchanged around the world. The benefits of MP3 compression were one of the fundamental factors to Napster’s success. Moore and McMullen (2004) explain the mechanics and benefits of MP3 files as follows: Prior to employing the MP3 compression algorithm, a music file stored on a computer could be as large as 40 to 45 megabytes in size, and would take around one and one-half hours to transfer over a phone line…After using the MP3 algorithm, the same music file would be around 3 to 5 MB and would take around 8 to 15 minutes to transfer. (p. 3) In true viral fashion, Napster quickly generated a user base of over 20 million unique accounts at its peak, with more than 500,000 unique IP addresses connected to the system at any one time (Blackburn, 2004). Prior to Napster, the music industry in the United States was growing after several years of stagnation (Blackburn, 2004). However, the gains made in the years prior to 1999 quickly disappeared once Napster launched.
  • I’m with the Broadband… © Matthew A. Gilbert, MBA Page 2 of 6 II. Here Comes the Judge Napster’s party would not last long. Citing copyright infringement, the Recording Industry Association of America (RIAA) sued Napster and other illegal online file sharing services. Berger (2001) estimates as much as 87 percent of files on Napster’s network were in violation of copyright law. Despite the ethereal and intangible nature of an online file exchange, the cost for this infringement is really quite tangible and troublesome. Moore and McMullan (2004) highlight a 2002 congressional report estimating that there were more than 3 million users swapping 2.6 billion songs per year, costing songwriters $240 million a month – an amount predicted to balloon to $3.1 billion annually by 2005. If the number of music available on-line were reduced by 30 percent, sales could have been approximately 10 percent higher in 2003 (Blackburn, 2004). Neilsen SoundScan also recorded a significant drop in music sales near college campuses between 1997 and 2000 (Blackburn, 2004). College campuses are the key to understanding digital music distribution – partly due to the early adopter tendencies of students when it comes to technology, music and popular culture, but also because most institutions of higher learning provide high speed Internet access at little or no charge to students. Zentner (2003) offers the following insight into the situation: Universities have very fast connections and Napster and its successors were banned in many of them because file swapping was consuming much of the available bandwidth. In the case of the University of Illinois at Urbana- Champaign, this amounted to 75 percent of the total bandwidth. (p. 3) Overall, Zentner (2004) estimates file sharing networks reduce the probability of purchasing music by 30 percent. However, the RIAA’s tactics have worked: Blackburn (2004) estimates the lawsuits increased album sales 2.9 percent during the 23 week period after the strategy was announced. Zentner (2004) adds that the RIAA’s pursuit of individual users resulted in increased record sales. On March 5, 2001 Napster was ordered to cease operations, and by July the system was shuttered. III. Napster Reloaded Napster’s demise did little to dent the development of replacement systems. However, Napster’s legal woes did influence one key technical factor in the design of all new platforms: none use a centralized server. Additionally, beyond music, many systems have evolved to accommodate movies, software, pictures, and documents. Interestingly, despite the tremendous fiscal impact file sharing has on music sales, it isn’t always considered negative by all artists. In fact, some actually welcome and fully support it. Blackburn (2004) explains this dichotomy as it relates to established and aspiring musicians: First, there is a direct substitution effect on sales as some consumers download rather than purchase music. Second, there is a penetration effect which increases sales, as the spread of an artist’s works helps to make the artist more well-known…The first effect is strongest for well-known artists,
  • I’m with the Broadband… © Matthew A. Gilbert, MBA Page 3 of 6 while the second is strongest for unknown artists. The overall negative impact of file sharing arises because aggregate sales are dominated by sales of well-known artists. (p. 1) Perhaps it is partly because of this that illegal file sharing systems continue to flourish while several sanctioned options have also become available (many as official distribution channels of large media corporations). To accommodate the growing need, Napster returned in October 2003 as a paid, sanctioned service. By the beginning of 2004, there was an array of additional options that also offered a subscription-based model for MP3 downloads of single tracks or full albums (Blackburn, 2004). Notably, Apple’s iTunes service (launched in January 2001) was the first major player and has grown to accommodate the increasing demand for video files and podcasts. Other players include Rhapsody, MusicMatch, Yahoo, and even Walmart.com. Overall, the number of users on all worldwide P2P networks is estimated to have reached nearly 10 million by October 2004 (Working Party on the Information Economy, 2005). The United States accounted for nearly 50 percent of all users (Working Party on the Information Economy, 2005). IV. Behold the Broadband Driving interest in and development of online file sharing systems is increasingly available, reliable and affordable broadband Internet access. The key to broadband – and the reason why it is so fundamental to the increase in online file sharing is its increased bandwidth. As explained by Zentner (2003), “broadband facilitates music swapping. A soundtrack that takes more than 12 minutes to download with a dial-up connection can be downloaded in as fast as 20 seconds with a high-speed connection,” (p. 3). Broadband is most widely available from the cable company via existing coaxial lines, or from the phone company (or similar provider) through a digital subscriber line (DSL) that makes use of telephone wiring. Cable offers download speeds as high as 8 megabits per second (mbps) and an upload rate as high as 768 kbps. DSL services offer users download speeds between 384 kbps and 1.5 mbps and upload availability of 128 kbps to 384 kbps. Cost remains a significant, though not necessarily limiting factor. Generally cable plans are more expensive than DSL – especially since AT&T dropped their rates to $14.95 per month. Cable costs between $30 and $50 per month, but offers additional benefits that justify the cost for certain consumers. Additional expenses may include the need for special equipment, installation fees and any other related expenses. However, even without the recent pricing reductions, cost might not be a barrier to entry into the broadband world for some consumers. Hatfield, et. al. (2003) explains how microeconomic theory illustrates that most rational consumers prefer goods and services that maximize their utility. After an initial awareness of a need is developed – faster Internet access in this case – a consumer researches options that meet that need; weighing features and benefits against strengths and weaknesses. The utility function helps consumers decide which goods to purchase given their View slide
  • I’m with the Broadband… © Matthew A. Gilbert, MBA Page 4 of 6 income, time and other constraints. The result of this cost versus benefit assessment ultimately influences a consumer’s decision. Atkinson and Newkirk (2002) add that, “broadband users…use the Internet for telecommuting, distance learning, and multimedia applications such as television, movies, and music. These represent the pressure points of broadband demand,” (p. 6). V. Bonus Tracks and B-Sides Change isn’t always easy, but anything worth having requires effort to attain. Likewise, the state of broadband access, P2P file sharing and digital music is best expressed by Kooser (2005) who notes, “Switching to a new form of technology can be exciting for a growing business but the road is rarely smooth,” (p. 32). Realistically, P2P networks and broadband Internet access represent a viable paradigm shift in the production and distribution of music and other forms of entertainment. Moving music online presents a vast and greatly untapped marketing medium. It is an opportunity, not a challenge. Research presented by Pew Internet & American Life Project (2004b) supports the belief that digital is the domain in which musicians should be operating: Artists and musicians are more likely to say that the internet has made it possible for them to make more money from their art than they are to say it has made it harder to protect their work from piracy or unlawful use. (p. ii) Times are changing. In light of the current legal climate, more consumers now use paid music and movie services than their illegal counterparts. According to the Pew Internet & American Life Project (2005), “34 percent of current music downloaders…now use paid services and 9 percent say they have tried them in the past,” (p. 6). Distribution channels have evolved significantly since the advent of the Internet and file sharing systems. According to Blackburn (2004), in 1999, 51 percent of albums were sold in retail music stores and 34 percent were purchased in other retail establishments. By 2003, the percentage of sales in music stores dropped to approximately 35 percent with more than 50 percent sold in other types of stores. Most significantly, by 2003, fully 5 percent of all music sales occurred through the Internet – a figure that has continued to grow in recent years. Generally, the core of music sales is shifting away from stores that exclusively sell music to more general merchandisers who offer items that complement or encourage a music purchase. Predominantly, large electronics chains like Best Buy and Circuit City, in addition to general merchandisers such as Wal-Mart are reaping the rewards. VI. Conclusion: Same Verse, Different Than the First Despite the negative effect online file sharing may have on sales of music CDs, it represents an entirely new distribution model for the future. Beyond the basics and mechanics of this electronic delivery system, offering music online – in a paid scenario – opens the doors to increased sales of complementary items and impulse purchases. Whereas MP3s are substitutes for CDs (just as CDs were substitutes for LPs) migrating to online music delivery provides new paths to revenue. View slide
  • I’m with the Broadband… © Matthew A. Gilbert, MBA Page 5 of 6 In addition, the Internet gets music to more people in more places than a single CD ever could. Curien, et. al. (2004) explains: An increase in piracy should generate a drop in CDs sales but an increase in expenses in ancillary products. [For example] DVDs and songs used as rings for mobile phone…encountered a strong growth over the recent period. (p. 16) Revenue from live concerts has increased in parallel with the explosion of online file sharing and MP3 availability. So, despite the turndown in CD sales, the digital distribution of music ultimately resulted in more revenue. Curien, et. al. (2004) offers the following explanation: Between 2000 and 2003, the 47 percent increase in revenues generated by live shows revenues has been much more important than the drop in CDs sales. Since the average price of a concert increased by 24 percent over the same period…between 2000 and 2003, both the volume of sold units and revenues do increase. (p. 16-17). References Atkinson, R., Ham, S. and Newkirk, B. (2002, September). “Unleashing the Potential of the High- Speed Internet: Strategies to Boost Broadband Demand.” Progressive Policy Institute Technology & New Economy Project. Berger, S. (2001). ‘The use of the internet to ‘share’ copyrighted material and its effect on copyright law.” Journal of Legal Advocacy & Practice, 3, 92-105. Blackburn, D. (2004, December 30). “On-line Piracy and Recorded Music Sales.” Harvard University: Department of Economics. Curien, N., Laffond, G., Lainé, J., and Moreau, F. (2004, November 11). “Towards a New Business Model for the Music Industry: Accomodating Piracy through Ancillary Products.” Laboratoire d’économétrie, Conservatoire National des Arts et Métiers. Hatfield, D., Jackson, M., Lookabaugh, T., Savage, S., Sicker, D., and Waldman, D. (2003, February 8). “Broadband Internet Access, Awareness, and Use: Analysis of United States Household Data.” University of Colorado, Boulder Jacover, A. (2002). “I want my mp3! Creating a legal and practical scheme to combat copyright infringement on peer-to-peer internet applications.” Georgetown Law Journal, 90, 2207- 2254. Kooser, A. (2005, September). “Answer the Call: Two Companies Ring In Much-Needed New Phone Systems.” Entrepreneur, September 2005, p. 32). Moore, R. and McMullan, E. (2004, October 29). Perceptions of Peer-to-Peer File Sharing Among University Students. School of Criminal Justice, University at Albany, State University of New York.
  • I’m with the Broadband… © Matthew A. Gilbert, MBA Page 6 of 6 Pew Internet & American Life Project. (2004a, April). “Pew Internet Project Data Memo: 55% of Adult Internet Users Have Broadband at Home or Work; Home Broadband Adoption has Increased 60 % in Past Year and Use of DSL Lines is Surging.” Pew Internet & American Life Project. (2004b, December 5). “Artists, Musicians and the Internet: They have embraced the internet as a tool that helps them create, promote, and sell their work. However, they are divided about the impact and importance of free filesharing and other copyright issues.” Pew Internet & American Life Project. (2005, March). “Pew Internet Project Data Memo: Music and video downloading moves beyond P2P.” Working Party on the Information Economy. (2005, June 8). “Digital Broadband Content: Music.” Organisation for Economic Co-operation and Development. Zentner, A. (2003, June). “Measuring the Effect of Music Downloads on Music Purchases.” University of Chicago. Publication Credit Gilbert, M. (2006). I’m with the broadband: The economic impact of broadband Internet access on the music industry. In Adams, M. and Alkhafaji, A. (Eds.), Business Research Yearbook, Vol. XIII (pp. 160-165). Saline, MI: McNaughton & Gunn.