The lost decade of digital music sales

Relics of a lost era.

Whenever the music industry complains about decreasing music sales, the usual culprit is piracy. The jury is still out with regards to the effect of piracy on music, but let us concede for the sake of argument that it has had some negative effect on sales. Whatever the figures are, growing evidence gives us a good idea of the mistakes made during the last 13 years with regards to the music business, and how the industry has shot itself in the foot by not offering competitive digital solutions.

One of the best charts explaining how the music industry got its strategy wrong is the following from Forrester Research depicting music sales by technology since 1965:

While it is difficult to read, this chart presents an astounding visual representation of what is happening to the music industry today. Vinyl sales peaked in 1980, but already the cassette was already a viable replacement, and at some point tapes overtook LP sales. Cassette sales peaked in 1990, and already CD sales were growing, and the cycle was repeated. However, the cycle was broken as CD sales peaked in 2002, but their technological replacement, digital downloads, were still not even viable. In fact, because the industry fought and delayed digital alternatives, the replacement started taking shape in 2005, well after the normal peak in CD sales had occurred. The result is that there is a gap of at least 4 years between the time when digital sales should have started, and the time in which the digital tide started turning. This is an eternity in Internet years.

An interesting result of the changing music landscape is that digital technology favours single sales instead of albums. Take this chart of what is happening with the Australian music industry, which seems to be indicative of what is taking place elsewhere:

It seems clear that digital single downloads are finally starting to take off, and have replaced the CD as the technology of choice. CDs will probably continue to slowly decline until they become something of a niche market for those of us who crave album sleeves, written lyrics, and plastic optical technology. However, even the above chart is misleading, as it would seem to suggest that digital has come to save the day. It has not. Contrast the two charts with the figures for turnover by technology between 1973-2009:

What this tells us is that the industry relied for too long on CD sales, and while the turnover from digital has now started to outstrip that coming from CDs, it is not keeping the upward trend that can be seen in other technologies. In other words, while sales are picking up, profits are decreasing. Why is this? Part of the reason is that the bulk of digital sales are for singles, which are considerably cheaper than a full album. Similarly, it seems like digital sales are simply not enough to maintain the industry in its present state. But to me the real culprit is that the music industry allowed the pirates free reign during key important years at the beginning of the last decade. By concentrating on useless and clunky DRM, by suing their own customers, and by denying an opening to digital innovators and alternative technologies, the music industry lost an opportunity to establish a timely alternative to the decline of the CD. They were hooked on CDs, as is evident from the above turnover chart. Simply put, they were in denial, and now they are paying the consequences.

In this must-read report from Michael Carrier, we are given some amazing insight into what really happened during those lost years. He interviews innovators, venture capitalists and technology experts about the years right after the Napster case, and he finds that the industry simply did not think that it had to change:

“One innovator remarked that, as early as 1995, the labels believed that “if we don’t like a given distribution technology, we just won’t license our content to it, and it will go away.” The innovator had explained to the labels that they would have a problem because the decentralized technology is similar to a “global game of whack-a-mole” and they would “be better served by being in control” of the technology and framing consumers’ expectations. Their response, however, was not enthusiastic: “yeah, yeah, whatever.””

This other testimony is depressing in its accuracy:

“One representative of a company offering a platform for digital music lamented the “very long and frustrating road” by which many record label officials “would do nothing” because of a “fear of changes to the status quo,” “fear of breaking the business model of selling CDs,” and “fear of disintermediation and price controls.”

Says it all really. When the history of the music industry is written, this will be known as the Lost Decade.