The Negative Impact of Technological Advances on Music Industry

Abstract

Terms like “continual growth” or “progress” cease to exist in an industry if there isn’t any room for “improvement” or “persistent change” as times move ahead, therefore eventually leading to unavoidable losses of sorts. In today’s day and age, individually buying musical content now has become outdated or a thing of the past and online services like Interactive Streaming have taken over as the redeeming feature of the music industry.

Intriduction and Background

History tells that any industry that has ever been prone to technological innovations, has always had it’s fair share of volatility. Constant introduction of innovations in the industry like radio, vinyl records, CDs has forced for round the clock re-invention of its business models. All these innovations eventually turned out to be sustaining innovations but the door to the digital era of internet brought about an evolution that was destructive to the pre-existing business plans.

Pre-existing models were based on the principle of pay per track or album/vinyl record/CD. These models accounted for higher production costs such as higher manufacturing costs, higher retail storage costs, etc. But why? Because once a song was written, composed and recorded by the artist(s), it had to be either engraved on a vinyl record or burned on a CD – which required proper manufacturing units. Once a vinyl record was engraved, packed and shipped to various retail outlets. The vinyl record was then placed on a shelf; it took about 12 inches of retail space. That retail storage space costed a fortune and an artist or a record label had to bear that cost until a person brought that vinyl record from the store. These costs obviously had a tremendous impact on a vinyl record’s pricing. Typically a new release would range from 15$-50$, also depending on the number of songs on it or the production quality of the vinyl record.

Digital era opened up many opportunities for artists/record labels, such as online download stores and then later on ONLINE STREAMING. These online digital retailers allowed consumers to download music files for a fixed price per individual track or album. This model was referred to as the “pay per track or album” model. The consumer gets to download the music file and store it digitally on a harddrive. Buying a digital music file doesn’t give one ownership over the song but is merely a perpetual lease for personal and non-commercial usage. As opposed to Physical retailers, by using digital downloading platforms one could buy songs separately instead of buying an entire album, here the artists or the record labels can have higher distribution and wider customer reach (as the sound recording can be mass reproduced on a computer and get downloaded as many times as required than vinyl records which had to get physically pressed in a manufacturing hub and then get sent out to physical outlets to get sold. Therefore, smaller distribution and narrower customer reach). The Pay Per Album/Track Business model accounted for a heavy ease on costs that are related production of these recorded files, (which are also known as MP3 or Mpeg 3 format audio files) and opportunities to earn good profits is high which in turn allowed for lower prices per track. But why was price per track low? - Since mass reproducing a digital track did not require much but an efficient computer, the cost of production is much lower as compared to physical production where manufacturing units are required to make properly pressed vinyl records. The volume of production is also ways higher in the case of digital reproduction of music, (here, the break-even output quantity is very low and so are their Marginal costs) overall, digital downloading musical content provided for much affordable and efficient ways to consume and sell music.

Piracy

However, the above-mentioned business model wasn’t able to assure copyrights holders' rights. Once a music file was downloaded off the digital download store, it could be stored in personal hard disks and therefore vulnerable to piracy. These downloaded files could be copied and sold illegally without any permission from the copyright holders. Introduction of worldwide web offered for great assistance by offering a platform for these illegal copies to be distributed. Success of Piracy cannot be contributed to consumer preferences but how easily available it was to the masses. Few of the major reasons why piracy grew in the West so fast was because of increase in Download Speed, access to write-able CDs and development of the MP3 format. Many of these factors are also held accountable for global widespread of piracy.

Online piracy reached it’s all time high or as one could term it as it’s arrival for the ‘mainstream” audience for the first time in May 1999 by the birth of a P2P website (Peer–to-Peer), Napster. It was used to share and download music files. These music files were shared without any royalties being forwarded to the copyright owners of the master and publishing rights. Napster had an estimate of 80 million unique accounts worldwide. Eventually Napster was taken down after a series of failed lawsuits in 2001. Global music piracy caused $12.5 billion of economic losses every year.

Streaming On Demand

Now instead of paying fixed price for one track or one album, interactive streaming servicesallow for immediate access to their catalogue of millions of songs. It generated revenue for copyright holders by demanding a fixed subscription fees per month from the consumers or through advertisement income. Digital download stores allowed one to store the musical file on their hard drive but with streaming services, consumer can chose for however long they chose to use a streaming platform’s library/catalogue/services. Interactive streaming services allow its users to listen to the exact music that they want to listen to, whenever they want to with access to their large catalogues. This is in contrast to the non-interactive online radio stations where choice of music is limited to what radio selects to play for the listener.

The streaming business model was initially perceived with a skeptical approach, thanks to the exploding growth of streaming services such as Spotify and Apple Music, now that the interactive streaming has sprung across various fields of digital entertainment as the premier business model.

The music on Spotify and other streaming services is properly licensed, i.e. it is delivered by labels and distributors only. For every listen/stream by the user, online radio services pay royalty to respective artists. Since on-demand music streaming services control internet piracy issue, offering credit and neighboring rights to the artists, they are turning out to be a legal hub for music lovers to tune-in to their favorites. Spotify has paid out over $9 billion in royalties to the music industry since its inception.

Conclusion

We can summarize by saying that, technological advances can harm any industry driven by it. Recorded Music Industry was no different, increasing number of innovations called for newer developed business models. One of these business models gave birth to a renegade business model of Piracy, causing millions worth losses. Rising from dirt of the past came the concept of Interactive Music Streaming in 2008. The industry is now slowly recovering through new business models generating revenue on the internet. First through a business model based on a pay per track or pay per album basis, and since recent years through the business model of interactive streaming. Since it’s inception, interactive streaming has provoked a wide-ranging debate about the benefits and drawbacks of ownership vs. streaming. Interactive streaming has finally brought back revenues for artists suffering from issues of piracy with a staggering 49% of overall growth rate while also treating to various tastes for the customers. Interactive Streaming has helped lower production costs helping artists gain higher revenues for maximum profitability. This has lead to decreased marginal costs per track causing economies of scale. Consumer can be seen as the only one who has benefitted both in past, now & in future.

References

• INSIDER.CO.UK, (2018, APRIL 3) “Five ways streaming has changed the music industry”
• HAYES, ADAM – INVESTOPEDIA, (2018, MAY 2) “How Does Spotify Make Money?”
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• DE ROUCK, MATTHIAS (2017, AUGUST 14) “MUSIC STREAMING SERVICES AND THEIR PATH TO FINANCIAL VIABILITY”
• MID YEAR 2018 RIAA REVENUES REPORT
• HERNANDEZ, PATRICIA – THE VERGE (2018, SEPTEMBER 20) “STREAMING NOW ACCOUNTS FOR 75% OF MUSIC INDUSTRY REVENUE”
• Hannes Datta, George Knox, Bart J. Bronnenberg - Changing Their Tune: How Consumers’ Adoption of Online Streaming Affects Music Consumption and Discovery
• Harry Fox (2014a) Licensing Rates
• Harry Fox (2014b) Royalty Rates
• Tschmuck, Peter, Dennis Collopy, and Carsten Winter. 'International Journal of Music Business Research.' (2012)