Piracy Pulling Down Music Sales

The FT reports that 95% of digital music downloads are illegal. The RIAA has tried many things, including taking college kids to court. Nothing works.

To my mind, piracy of music:

1. Is inversely related to the chances of getting caught, which is very low.
2. Is inversely related to the punishment if caught, which is mild.
3. Is inversely related to the disapproval from friends and family who might know that you are using illegal music. This is almost non-existent.

All of these factors might indicate that piracy can’t be vanquished. But there is something that the music labels could do to start beating it back – reduce the cost of digital music dramatically.

Today the price of a song averages around $1. The marginal cost of delivering the next song is close to zero. So if you were to somehow know what the price to downloads curve might look like, all you would do is to set a price where the product of price and downloads was maximum. But of course, you don’t. Which is why the price of a song is stuck at $1.

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Obviously, executives in the music industry have a pretty tough choice. First, they may not be able to convince all parties – Apple, artistes – to agree to a dramatically lower price. Doing it for one song doesn’t really work – it won’t change habits. They need to go the Full Monty. That’s a tough sell. Even if they managed to get that far, it is likely that revenue would plummet in the short term before it started rising again. On the other hand, it takes one bad quarter to get you fired.

The leap of faith is that reducing the price per song to a tenth of what it is today can take the share of legal downloads from 5% to 50%. Isn’t it time someone took that chance? After all, things can’t get much worse can they?

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8 Responses to Piracy Pulling Down Music Sales

  1. absolutely!! high time these Music industry sees these pirates as opportunity than a threat…

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  2. MrDalal says:

    Wrong logic, you are ignoring the logsitics completely.
    Micropayments have not picked up in any meaningful way.

    I would like to think, there are two lines converging – one representing growth of micropayments, and one representing dropping costs of music. when they converge, this will work.

    same holds for journalism.

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    • Basab says:

      @MrDalal,

      good point but micropayments is happening now. You’ll see it on paid sites like New York Times on Apple’s tablet. And you might even see it on iTunes itself soon.

      also, a low unit price doesn’t necessarily mean a micropayment infrastructure. Selling in bundles of 10 songs or 50 songs takes care of the payment side of things while keeping a low unit price per song.

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  3. MrDalal says:

    Basab, both your points are wrong.

    1. Micropayments (in any meaningful scale) are not happening, and will not happen in the near future. New York Times will do something in 2011, and 0.000001 percent of people who can read in the world will own a tablet.

    2. The minute you bundle 50 songs, there is a HUGE entry barrier for the whole purchase activity. "WHAT ??? YOU JUST PAID 50 DOLLARS FOR SOMETHING YOU CAN DOWNLOAD FREE?"

    Music Piracy and inability to charge for quality journalism is one of those things our generation just has to live with. Its like the services business, you can do 1000 things and say 1000 things, but finally the indian engineer will work for 20k a month, 1 dollar equals 45 rupees, and bankofamerica (and countless others) is a profit making entity. thats how it is, and there is no way out.

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    • Basab says:

      @MrDalal,

      50 times 0.10 is $5.

      I don’t think micropayments will be barrier. And really, its an enabling technology not the prime driver for paid digital content. Whether there is a market for paid content in digital music or online journalism – only time will tell. What I know is that something has to give – both the music industry and the newspaper industry are bleeding. I am hopeful.

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  4. MrDalal says:

    (contd..)

    now, things will change, like i mentioned – there are two lines converging – one representing growth of micropayments, and one representing dropping costs of music. when they converge, this will work. when will they converge? my guess is, not this generation.

    the smartest thing the music folks can do is to bring the price down to zero. and make money on something else.

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  5. cd ripping says:

    Piracy has been a major problem that drag down the growth in not only music sales,but also cd sales and dvd sales.But I think things will become better later on.I believe related laws will soon be came out.

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