LAST WEEK the recording industry decided that it was easier to extort money than adapt to changing technology. According to The Cavalier Daily, seven University students received pre-litigation settlement letters (That is, give us your money or we'll sic our lawyers on you.) from the Recording Institute Association of America (RIAA) for illegal music downloading. The RIAA blames illegal downloads for more than $300 million in lost revenue and a $3 billion decline in sales over the last six years. But where did these numbers come from?
Record labels seem to think that they've lost the revenue of an album sale every time someone illegally downloads a song. They're assuming that someone who downloads music would have otherwise bought the music if downloading was not a viable option.
But would they? The cost of downloading is the energy expended clicking a computer screen while a CD costs at least ten dollars. That implies that most downloads are probably not, in fact, lost sales. If downloading songs doesn't actually cost record companies money, then it isn't really stealing. The real reason they're losing money is the changing nature of the industry.
Record companies' inability to deal with the internet has been on full display over the past decade. Only recently have they allowed customers to buy individual songs through programs like iTunes. And they only started cutting deals because the volume of illegal downloading left them with few options.
Major record labels have, quite simply, misjudged what people wanted. They missed two major trends: the individualization of music and the changing record company-musician relationship.
Rapid technological advances have enabled everyone to enter his or her own universe. The ability of the new economy to tailor products to very specific people means that niche markets spring up to satisfy every idiosyncratic taste. Nearly unlimited choice combined with uniquely American individualism made for exciting times. Too bad record executives didn't notice.
Joseph Schumpeter wrote about the process of "creative destruction" in which outdated firms go under as the underlying technological paradigm shifts and society advances. Cars wiped out horse and buggy companies; gas heating replaced coal furnaces; and now the recording industry's business model's time has come. Peer-to-Peer file sharing networks have stripped record companies of their raison d'être: publicizing and promoting albums.
Instead of embracing "new media" and targeting songs and new artists at the most specific audience possible, record labels upped their cut of album sales. Musicians see merely pennies on the dollar of each album sold or when their songs play on the radio. Artists have to make their money by going directly to their fans through ticket sales and merchandise. But when bands can build a buzz and a following by putting their music online, they have no need for record labels. No wonder sales are down so much.
By whittling away artists' stake in their own album sales, record companies sowed the seeds of their own demise. Even the Dave Matthews Band wasn't upset when an unreleased album popped up on Napster. Recording companies have been stubborn and instead of changing their structure or accepting the inevitable, they took to the courts.
In 1999 the RIAA filed suit against Napster for facilitating the transfer of copyrighted material. After Napster's appeal failed in 2001, the RIAA won an injunction forcing Napster to shutdown its network. A swathe of settlements followed and the service was finished.
After taking out Napster,the recording industry set its sights on Kazaa. Kazaa cut a deal and had to pay hundreds of millions of dollars. Then, in 2005, the Supreme Court gave the record labels their greatest prize: MGM Studios, Inc. v. Grokster, Ltd. The Court unanimously ruled that since Grokster and Streamcast (maker of Morpheus) could reasonably expect illegal file sharing to happen on their networks, they could be sued by record companies despite not actually having done anything wrong. So much for justice.
The lone remaining effective P2P network is LimeWire. It's hoping that requiring its users to agree that they won't transfer copyrighted material will shield it from litigation. The recording industry's heavy-handed approach shows just how afraid it is of working with artists to give their customers what they want: cheap individual songs.
Which brings us back to the seven University students. They downloaded a few songs from their favorite bands and now have legalese letters telling them they'd better pay or else.
The real legal question is, as the world increasingly runs on intellectual rather than physical property, what is stealing? Listening to a few tracks that you wouldn't have bought anyway doesn't sound like it to me. And taking money from everyone involved doesn't sound much like justice either.
Josh Levy's column appears Mondays in The Cavalier Daily. He can be reached at jlevy@cavalierdaily.com.
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