Analytical Wealth

Every now and then I see a commentary on the music industry that notes reduced CD sales (especially to young people), and then goes on to blame the RIAA’s attacks on Napster, lawsuits against down loaders, etc, as the cause. The basic idea is that young people are so angry with the record companies that they’re refusing to buy CDs, and that the music industry dug its own grave by not embracing file sharing, suing people, etc. While I respect many of these commentators greatly, I think they’re missing the boat as they’re not considering how young people actually listen to music these days.

The problem with the above argument is that it basically assumes that CD/DVD players are the preferred music listening device amongst young people, or that the preferred method of acquiring music is via a CD. In truth: iPods/MP3 players followed by personal computers are the most popular listening devices. A lot of people my age don’t even own stand-alone stereo systems, as they listen to all of their music on their iPods or on their computers. Even if they own CDs the bulk of them are burned from their digital music collections, as opposed to being pre-recorded.

My age group (early 30s and younger) prefers digital music formats over CDs, so much so that even if the music industry had been the one to launch Napster, had never sued anyone, shut down a file sharing network, etc, CD sales would still be declining. In my opinion the focus on CD sales is a remnant from a time when only physical formats were available, and the primary listening device was a CD or Tape player. The real issue is a change in the media consumption pattern from a consumer that purchased physical formats exclusively, to one where the consumer can acquire music digitally, for free and via the physical format.

CDs can no longer be used as a proxy for determining the public’s interest in purchasing music, instead you have to aggregate digital downloads (paid and free), file sharing between friends and CD purchases. Additionally you have to account for the fact that being able to download individual songs frees people from having to purchase a CD for only a couple of songs, thus depressing album sales be they digital or physical. Finally you have to account for the impact of services like Real Network’s Rhapsody, that provide a consumer with access to thousands of albums (that can be synched to a portable device) for a small subscription fee.

Considering the above it would be quite easy for an individual consumer to dramatically reduce their CD purchases but actually acquire significantly more new music, and spend less money on music at the same time. As a result, you can’t use CD purchases and/or money spent on music as an effective gauge of the public’s interest in purchasing music.

Digital music is such a game changer that it’s difficult to make a direct comparison to the days when only CDs were available. Over the past ten years the way music is bought and listened to has changed dramatically, as a result you can no longer use the same old metrics to gauge the public’s interest in music. The only way to effectively gauge the public’s interest in buying music is to compare sales over the past 3-6 years, and then look at total purchases across all formats. I.e. are aggregate music purchases across all formats increasing in the post “iTunes world”?

According to Nielsen’s Sound Scan: CD purchases declined 15% in 2007 compared to 2006, however digital downloads increased by 45% and total music purchases including CDs, Singles, Digital Downloads and Music Video rose 14% from ’06. Simply put: demand is increasing.

While there are undoubtedly angry music fans that are refusing to buy CDs on principle, they’re undoubtedly a small minority as demand for music still remains strong. What’s happening to the music industry (companies and artists) is that selling CDs is more profitable than selling digital formats, and as demand for music shifts from CDs to the digital domain they’re suffering financially.

Moving forward the big question is whether or not the music industry will find a way to monetize the digital world as well as they did the physical one.

Sources:

The NY Times (Via the AP) – U.S. Album Sales Fell 9.5% IN 2007, January 4, 2008.