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RIAA Statistics Don't Add Up to Piracy
The RIAA (Recording
Industry Association of America) has a real funny way of
looking at things. Not funny - "ha ha", Funny - "odd."
Before you read the rest of this story, I heartily encourage
the reader to click on the RIAA link above. Make your own judgement
before you hear a thing I have to say. Take your time. Be sure
to look at their Market Data because I'm going to be quoting
it.
The sky is falling! The music industry is doomed! Woe is everyone.
The pirates have stolen all the gold. What will we ever do? How
can we possibly recover? You've poured water on us and we're
melting!
Let's quote a few of the RIAA's statements. The first quote
comes from the report on 2001 year-end shipments. The title --
"Recent study Illustrates Internet Piracy's Impact on Music
Market"
WASHINGTON-The Recording Industry Association of America (RIAA)
announced today that the number of units shipped domestically
from record companies to retail outlets and special markets (music
clubs and mail order) fell 10.3 percent in 2001.
Specifically, total U.S. shipments dropped from 1.08 billion
units shipped in 2000 to 968.58 million in 2001-a 10.3 percent
decrease. The dollar value of all music product shipments decreased
from $14.3 billion in 2000 to $13.7 billion in 2001-a 4.1 percent
decrease, according to figures released today by the RIAA.
"This past year was a difficult year in the recording
industry, and there is no simple explanation for the decrease
in sales. The economy was slow and 9/11 interrupted the fourth
quarter plans, but, a large factor contributing to the decrease
in overall shipments last year is online piracy and CD-burning,"
said Hilary Rosen, President and CEO of the RIAA. "When
23 percent of surveyed music consumers say they are not buying
more music because they are downloading or copying their music
for free, we cannot ignore the impact on the marketplace."
 Time out. Total number of units fell 10.3 percent. Total sales
dropped 4.1 percent. Sorry, Hilary, there is a simple
explanation -- The economy sucks, you guys raised prices anyway
while promising to copy-protect everything and make it harder
to listen to. The consumer took a step back.
And here is another contributing factor, from their article,
"The Value of a CD". Last time I looked, this was the
top story on the RIAA home page.
Of course, the most important component of a CD is the artist's
effort in developing that music. Artists spend a large portion
of their creative energy on writing song lyrics and composing
music or working with producers and A&R executives to find
great songs from great writers. This task can take weeks, months,
or even years. The creative ability of these artists to produce
the music we love, combined with the time and energy they spend
throughout that process is in itself priceless. But while the
creative process is priceless, it must be compensated. Artists
receive royalties on each recording, which vary according to
their contract, and the songwriter gets royalties too. In addition,
the label incurs additional costs in finding and signing new
artists.
Once an artist or group has songs composed, they must then
go into the studio and begin recording. The costs of recording
this work, including recording studio fees, studio musicians,
sound engineers, producers and others, all must be recovered
by the cost of the CD.
While this is true, all of those costs will be fully recovered
from the record company out of the big 8 cents per song the artist
gets paid. But that's another argument for another day. Here's
the interesting part.
Another factor commonly overlooked in assessing CD prices
is to assume that all CDs are equally profitable. In fact, the
vast majority is never profitable. Each year, of the approximately
27,000 new releases that hit the market, the major labels release
about 7,000 new CD titles and after production, recording, promotion
and distribution costs, most never sell enough to recover these
costs, let alone make a profit. In the end, less than 10% are
profitable, and in effect, it's these recordings that finance
all the rest.
I was very happy to see them provide this information, because
after compiling the RIAA's market data, I had noticed that the
"new releases" data which had been present in all of
the information from 1992 to 1999 had somehow been overlooked
when the RIAA put together the 2000 and 2001 summaries.
Year End Statistics - Table #1
PDF
file with data recalculated to 1992 dollars -- Prepared by Dimitri della Faille, Université
du Québec à Montréal
So the record industry cut their inventory (and artist investment)
by 25 percent and sales only dropped 4.1 percent, even though
the economy is at rock bottom. There were almost 12,000 fewer
new releases for the consumer to choose from in 2001 than 1999.
The record companies are making more money per release than ever.
According to recent surveys among a total of 2,225 music consumers
between the ages of 12 and 54, commissioned by the RIAA and conducted
by Peter Hart Research Associates, 23 percent of those music
consumers surveyed said that they did not buy more music in 2001
because they downloaded or copied most of their music for free.
Some have questioned whether downloading results in sales
displacement. In addition to the actual claims of the consumers
about their own buying patterns, there has also been explosive
growth in the copying of that downloaded music onto a burned
CD or a portable mp3 player. In the 2001 survey, over 50 percent
of those music fans that have downloaded music for free have
made copies of it. Just two years ago, only 13 percent copied
it onto a portable device or a CD burner.
Up until two years ago, modems were too slow to download music.
Duh. Did anyone ask these consumers if they were downloading
major releases or freely uploaded Independent music? If it was
the latter, that's exactly what we want the consumer to do. If
piracy is the problem, why is it that sales didn't start declining
until AFTER the RIAA had Napster shut down?
Let's see how the "sales displacement" theory holds
up under scrutiny, using the RIAA's own statistics. All of these
figures came from the RIAA's web pages, with the exception of
Average Unit Price, which was calculated based on figures given.
Some of the 2001 data was not included on the site either and
had to be extrapolated from what information was provided.
Year End Statistics - Table #2
Okay, sales are down 6 percent over the past two years. Considering
the economy, that doesn't seem like such a serious problem. I'd
also say that pushing the average price (these figures are net
after returns) over $14 a unit probably didn't help any, either.
If the record industry had gone forward with the 12,000 releases
that it cut back over the past two years and only sold 3,000
copies of each title (a loser in record company terms), both
the units shipped and total sales would have continued to climb
as they had in previous years.
Here are Hilary Rosen's concluding remarks on the state of
affairs at the end of 2001.
"Global piracy on the physical side costs the recording
industry over $4 billion* a year. That doesn't even include losses
on-line. While the physical piracy problem is not new, our markets
continued to expand. Now that consumer purchasing is threatened
as well, the impact of all piracy is greater." concluded
Rosen.
The source of the $4 billion figure is attributed to "IFPI,
the international association representing the recording industry
worldwide." Good thing she passed that one off on someone
else. I just don't see where the justification for that figure
could possibly come from. The numbers are simply not there. In
short, this is total bullshit.
But wait. Something is missing from the 2001 statistics, at
least the ones I could find. Singles. For some reason they stopped
reporting this information. The reason is obvious. The single
is dead. This is what the record companies are screaming "pirate"
about. This is the product that the Internet has killed. And
yet, this comes nowhere near the fictitious $4 billion in "lost
sales" mentioned above.
Disproving the theory that "You'll never go broke underestimating
the taste of the American public" (H.L. Mencken -- thanks
to the slashdot crowd for
pointing out my error), U.S. buyers have apparently come to the
realization that $3.50 to $5.50 is too damn much to pay for one
song.
Year End Statistics - Table #3
You'll note that, even with the 1992, 1996 or 1997 figures,
it would take 10 years for this to add up to the $4 billion in
"piracy losses" that someone is pulling out of the
air (or a somewhat lower area from which things like this are
known to emerge). Hilary Rosen is going to have an even tougher
time trying to explain what's going to happen next without making
the tale of pirates sound even more like the fictional account
than it is.
Before I continue, however, if anyone spots an error in the
charts above, let me know and I'll correct them. As I said, some
data was extrapolated. If you've got a real number, let's hear
it (and the source). Not that's it going to matter much. The
record companies are going to realize that the pirates are not
the consumers that downloaded a few mp3s. The real pirates are
coming and they're going to do more than steal a few songs from
you.
We're going to tear down your castle walls.
Independents' Day
I am hereby declaring July 4, 2003 as Independents' Day.
On that date, MacWizards Music is going to offer a record
contract to every act that appears at the IndiePie
event. The basic terms are going to look something like this.
Maybe not exactly, but as close as I can get to it:
- Term of contract - One release, non-exclusive
- Copyright owner retains all rights to exploit the work in
whatever manner they see fit.
- CD retail price will be $9.98 or less.
- Royalties
- While actual non-inflated production costs
(pressing and printing -- NOT studio costs, mastering, etc.)
are being recovered, income from sales will be distributed as
follows:
- An "Investor" (possibly but not necessarily MacWizards
Music -- could even be the artist) gets 25 percent to apply against
the production costs. The remaining 75 percent (the profit)
is divided as follows:
- MacWizards Music gets 12.5 percent of the profit for being
the record label
- The "Investor" gets 12.5 percent of the profit
for putting up the cash in the first place.
- The artist gets the other 75 percent of the profit.
- IMPORTANT NOTE -- Let me rephrase this so that everyone
stops trying to correct my math. In the statements above, 25
percent of the Sales Income is directed toward cost recovery.
The remaining 75 percent of the sales income represents 100%
of the profit (for the purposes of payment to the appropriate
parties) and the total amount which is divided among the three
entities. It has to add up to 100% -- not 75% as many have suggested.
- After production costs are recovered, profits will
be distributed as follows:
- MacWizards Music gets 12.5 percent for being the record label
- The "Investor" gets 12.5 percent for putting up
the cash in the first place.
- The artist gets the other 75 percent.
- All other services are negotiable -- Marketing and advertising,
initial production run, targeted distribution, studio production,
etc.
There are 50,000 independent bands listed at GarageBand.com alone. Thousands more can be found at mp3.com, DMusic and Vitaminic, just to name a few. More are cropping up daily. Last year, the major labels only released (according to RIAA statements above) 7,000 new recordings. Less than half of the Indies got a release of any sort. And correct me if I'm wrong, but I think that the record industry is paying a little less than 80 percent of the profit to the artists.
Let's go back to the RIAA's stats for a moment. Potentially, they missed at least 30,000 available acts in 2001.
If only one in 10 releases is successful, we're talking about 300 killer acts [defined by the theory that 10% of successful acts are killer acts]. And let's call "success" unit sales of 100,000 (a tenth of what it takes to qualify for the record industry's definition of the term). At $10 a unit, that's $30 million. Take off $2 a unit for actual costs and the profit is about $24 million. I'd give up 75 percent of that (assuming MacWizards acted as the Investor for each and every product), still be very, very happy and have plenty left over to finance the other 27,300 failures. If I can only sell an average of 1,000 copies of the "failures," that's still another $2.1 million profit. Take away production costs and I still make more than $250,000 on the "failures."
At the same time, I'd be putting 6 times that much into the artists' pocket.
Think outside the box? How about we just kick the box into the river, turn our back on it, let it float away and slowly disintegrate on its own?
So all aboard, Mateys! Are you tired of being forced to walk the plank because you're not the "flavor of the month"? Are you tired of giving all of your gold to the captain of the ship? Have you had enough of watching your children (the musical works to which you gave birth) be taken away for 35 years, maybe even shackled in the basement or attic because they have been declared unfit for the eyes and ears of the public?
The RIAA is looking for pirates. Let's show them what the real pirates look like. We'll give them a good look as we plunder their castle, claim the gold that is rightfully ours and free the indentured servants that they have taken hostage.
We've had enough. Independents' Day is coming.
Historical Notes and References
May, 2000 -- The Federal Trade Commission unanimously found reason to believe that the arrangements entered into by the five largest distributors of prerecorded music violated the antitrust laws in two respects. First, when considered together, the arrangements constituted practices that facilitate horizontal collusion among the distributors, in violation of Section 5 of the Federal Trade Commission Act. Second, when viewed individually, each distributor's arrangement constitutes an unreasonable vertical restraint of trade under the rule of reason.
May 10, 2000 -- Record Companies Settle FTC Charges of Restraining Competition in CD Music Market
All Five Major Distributors Agree to Abandon Advertising Pricing Policies
The Federal Trade Commission announced today that it has reached separate settlement agreements with Universal Music and Video Distribution, Sony Corp. of America, Time-Warner Inc., EMI Music Distribution and Bertelsmann Music Group (BMG), the five largest distributors of recorded music who sell approximately 85 percent of all compact discs (CDs) purchased in the United States to end their allegedly illegal advertising policies that affected prices for CDs. The proposed agreements would settle FTC charges that all five companies illegally modified their existing cooperative advertising programs to induce retailers into charging consumers higher prices for CDs, allowing the distributors to raise their own prices. The complaints are the culmination of an extensive industry-wide investigation by the FTC of these practices. The FTC's orders would require all the companies to discontinue their "Minimum Advertised Price" (MAP) programs in their entirety for seven years. The orders contain additional provisions to preclude the companies from maintaining the anti-competitive status quo.
"The FTC estimates that U.S. consumers may have paid as much as $480 million more than they should have for CDs and other music because of these policies over the last three years. These settlements will eliminate these policies and should help restore much-needed competition to the retail music market, consisting of $15 billion in annual sales. Today's news should be sweet music to the ears of all CD purchasers," said Chairman Robert Pitofsky.
Despite this noble effort by the government, the average price of a CD has continued to rise. Thanks to Mick Right for digging this one up.
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