The Christian Science Monitor recently published an article focusing on independent labels and musicians. While recording industry album sales were down 11% overall in 2002, some independent outfits saw sales increases of 50 to 100 percent, all while eschewing mainstream radio play.

posted by Matt Haughey

Tim O'Reilly fowards a rant about how the RIAA unfairly blames P2P as the reason for their drop in sales and how their statistics show otherwise.

IP
From: Tim O'Reilly

Date: Sun, 13 Apr 2003 18:13:44 -0700

To: David Farber

Subject: FW: The Music Piracy Myth

Dave, I thought your readers might enjoy the following rant from George Ziemann, who's been doing analysis of the RIAA members' own statistics to argue that the decline in sales is related to their reduced title output and higher prices, not to file sharing.

For the articles to which he refers, see
http://www.azoz.com/music/features/0008.html and http://yahoo.businessweek.com/technology/content/feb2003/tc20030213_9095_tc078.htm

From: George Ziemann
Date: Sat, 12 Apr 2003 22:47:19 -0700
Subject: The Music Piracy Myth

Currently, if you do a google search on RIAA statistics, I'm number one and two; you are three and four, and your article refers to me, so I know you know who I am.

The article to which you referred was published in December. Since that time, a lot has happened, as I'm sure you are aware, not the least of which being the RIAA's recent lawsuits against college students.

First of all, I am a musician. The only reason I even started researching what the RIAA has to say is because of the problems I had selling my own work at eBay, which were entirely due to RIAA accusations of copyright infringement (it was my own CD).

After looking at the 2002 RIAA data, I also realized that over the last 5 years, the recording industry has shipped out more than 2 billion physical units of product, adding up to a retail value of more than $20 billion. You'd think that they would embrace a free marketing and promotion opportunity like mp3s. Let's face it, an mp3 is an inferior copy. I consider mp3s to be an ad for my actual recording.

My current consternation comes in the form of a letter from my congressional representative, who states that "In 2001, record sales were down 10 percent because of unauthorized music downloads..."

Yes, sales were down. Other than that obvious fact, there is no empirical data to suggest that downloading is the cause of the problem. I've asked the RIAA. In fact, I would go so far as to say I have relentlessly taunted them in hopes of a reasonable explanation. They offer none.

So think about this. As the original research I conducted indicates (and has been verified by SoundScan via BusinessWeek.com), the record labels began to reduce the number of releases BEFORE the Napster hearings. When they went in front of Congress to complain about downloading, Hilary Rosen could confidently state that sales were going to suffer.

Because it was engineered.

Here's another interesting point. I can go to www.discmakers.com and order CDs for $1.89 each. Not "replicated" but created from a glass master. As I understand it, the current wholesale price for a CD is about $12.

So how can EMI's Cost of Goods Sold (2001 -- at Hoovers Online) be 71% of their income? BMG's 2001 annual report blames industry shortcomings "long obscured by market success" and Vivendi told its stockholders that an "anticipated lighter release schedule" had something to do with it. BMG is the only one that even mentions file sharing -- as a justification in investing in Napster.

Why does "sales are down 10%" overrule any other explanation for declining sales? A bigger question is -- Why won't anyone in the media even discuss this?

Recently I spoke to the FCC at a public hearing in Tempe (Phoenix area). Next month, I'm going to speak at the DMCA hearings at UCLA Law School.

Additionally, I'm hearing from college kids all over (Duke, Auburn, UCSD, Univ. of North Carolina, Yale Law School, Univ. of Wyoming). They're reading my site and they're using it as background for dissertations and reports. They ask questions. They do not accept vague answers.

Why does the government accept the "sales are down" without any consideration of other, equally plausible explanations? And why does the press?

When the majority of the public is guilty by default, then something is terribly wrong. I'm not sure why I'm even writing to you, except that you seem to be about the fifth person in the country that has applied some logic to this issue.

I've written to every member of the Senate Judiciary Committee, Commerce Committee and Small Business Committee. I've written to Jay Berman, Hilary Rosen and the Recording Artists Coalition. With the lone exception of Janis Ian, absolutely everyone has totally ignored me.

What can we do?

3 Comments

Ziemann's analysis of RIAA figures meshes with my more theoretical approach.
It is becoming widely accepted that the distribution of sales follows a power law curve, rather than a normal distribution. In such a distribution, sales are inversely proportional to rank order.

However, for any market there is generally a saturation point, where the curve tapers off as the number of sales is no longer enough to support the fixed overheads.

For the net, as pages aren't charged for, these curves go all the way down; for movies, newspapers and music, they taper off sooner.

Ziemann shows that the response of the RIAA members was to move the saturation point up further - cutting off the 'marginally profitable'. However, the net was simultaneously enabling new business models with far lower overheads than the traditional label/radio/record shop nexus. This is a classic Christensen 'Innovators Dilemma' scenario - the labels 'retreat to quality' while the independents and lone musicians use the web to create a lower cost, better value market.

I've previously proposed a model for rewarding creators of digital works that is designed to work all the way down the curve, and thus insulate the operator of the infrastructure form the vicissitudes of fashion.

Interesting info from Messrs. O'Reilly & Ziemann. I would generally agree with the thesis and the information cited seems to concur. One point that I would make, however, is that while Ziemann seems incredulous that EMI's FY2001 Cost of Goods Sold (COGS) is 71% of income (in fact it's 71% of *revenues*), this figure is not entirely unreasonable.

Of course burning & stamping the physical media presumably costs EMI less than $1 per CD, but COGS covers all the other production costs EMI incurs. These costs include royalties to artists, studio & mixing expenses, and so on (excluding sales & marketing costs generally accounted for in SG&A). So it's not particularly unbelievable that the total COGS would be ~70%, still yielding a respectable 30% gross margin in a competitive industry.

Again, very thoughtful piece, merely trying to clarify facts for other readers here.

Can you tell me what the Jpanese Music Record Sales were in 2002-2003. What percentage of these were Rock, and how much money was earned from this.

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