What to do About Falling Music Sales

David Goldman at CNNMoney.com writes about the decline in the music industry business

Apple’s (AAPL, Fortune 500) iTunes is credited with finally getting people to pay for digital music, but it wasn’t unveiled until 2003.

In the time between Napster’s shuttering and iTunes’ debut, many of Napster’s 60 million users found other online file sharing techniques to get music for free. Even after iTunes got people buying music tracks for just 99 cents, it wasn’t as attractive as free.

and

Now just 44% of U.S. Internet users and 64% of Americans who buy digital music think that that music is worth paying for, according to Forrester. The volume of unauthorized downloads continues to represent about 90% of the market, according to online download tracker BigChampagne Media Measurement.

Matt Yglesias responds

Music industry executives can tell themselves that as long as they want. But under conditions of perfect competition, the price of a song ought to be equal to the marginal cost of distributing a new copy of a song. Which is to say that the marginal cost ought to be $0. That’s not a question of habit, you can look it up in all the leading textbooks. Of course real businesses rarely operate in circumstances of perfect competition, and record companies have a variety of political and legal tools they can deploy to try to protect monopoly rents. But this is hard to do. I think the real story with the iTunes store is that over time competitive pressure has impelled it to largely drop DRM and over time I expect we’ll see that the CPI-adjusted price of songs declines.

If you are a music industry executive, you can wait for CD sales to bottom out at somewhere close to nothing. Or you can take the initiative

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.