Circling the Wagons

Why iTunes Won't Save the RIAA From Pirates, Downloads, Lost Product, and Ill Will

Three years ago this week, a court order shut down Napster. The major labels that are the core of the Recording Industry Association of America believed that it was in their best interests to squash the Web's first major file-trading service; they couldn't have been much more wrong. Killing it instead of ignoring or co-opting it only opened up the field to more resilient successors: Audiogalaxy, then Kazaa and Gnutella, and now so many alternatives that the RIAA will never be able to catch up.

So, with CD sales declining, unauthorized digital reproductions it can't cash in on rising, and public ill will ubiquitous, the recorded-music industry is circling the wagons more tightly than ever. Ten years ago, there were six major record labels. In 1998, MCA's parent company Seagram bought Polygram; the merged company became Universal (and, in 2000, Vivendi Universal). Now there are five.

There may soon be four. Warner Music (AOL Time Warner's music division) and BMG (music division of the German media company Bertelsmann) are dancing a tentative mating lambada; EMI reportedly has its eye on Warner Music as well. EMI and Warner tried to meld a few years ago, but were blocked by the European Union on the grounds that the resulting company would be too big. This time, though, they can plead poverty, or at least plummeting income, to make the case that a merger is necessary—a five-corporation oligopoly that controls over 90 percent of music sales would work more efficiently as a four-corporation oligopoly.

Of course, the industry's panic comes partly from its sense of entitlement to ever-rising sales. Until 2001, American record and CD purchases had increased every year for 18 years. Before that, though, there had been a multi-year decline—between 1978 (the peak of disco) and 1983, album revenues fell every year, ultimately by around a third, before they started rising again. In any case, perhaps sensing that it should get out of physical media while the getting's good, AOL Time Warner is trying to sell off its plants that press CDs and DVDs, too.

Somebody else is pressing CDs profitably, though, and selling them much more cheaply than the majors do. The International Federation of the Phonographic Industry (the worldwide equivalent of the RIAA) reported earlier this month that a third of all CDs sold worldwide are pirated—1.1 billion last year, for a total value of $4.6 billion. It's not clear what hat they pulled those figures out of, but as anyone who's shopped for 50 Cent rarities on Canal Street can tell you, CDs can be made and distributed for only a couple of dollars, especially if the people selling them don't pay production costs, artists' royalties, or radio promotion fees. Most pirated CDs, though, are sold in countries with bigger issues to worry about than copyright. At Russian street kiosks, for instance, 60 rubles (about $1.80) will get you a professionally manufactured greatest-hits collection by anyone from Annie Lennox to Helloween, often designed to look just like Abba's Forever Gold. Another 10 rubles, and you can get a CD with MP3s of every song by your favorite artist (Marie Osmond, Brian Eno, Nurse With Wound . . . ), with lyrics and pictures thrown in for good measure. It's hard for a $20 Linkin Park CD to compete.

Meanwhile, legitimate CD sales in the U.S. were down 8.7 percent in 2002—a decline of 62 million discs, or about 8 times what The Eminem Show sold—and they've slipped further in the first half of 2003. The music-biz pundit George Ziemann of Azoz.com added up the RIAA's own sales figures and noticed an alarming statistic: Over the last five years, the difference between the number of units (CDs, cassettes, etc.) shipped but not returned and the number actually sold at retail accounts for another $3 billion to $4 billion a year. Even if you factor in the rapidly dwindling sales from record clubs (which don't count as "retail"), billions of dollars' worth of CDs appear to be, effectively, falling off the back of American record companies' trucks.

The new technology that saved the music industry in 1983 was MTV. The one that's supposed to save it this time is Apple's iTunes Music Store—but it's more of a dashboard Jesus than an actual miracle worker. Apple is selling about 500,000 downloads a week at 99 cents apiece, and reportedly keeps about 34 cents from each one; the mechanical royalty that goes to songwriters and music publishers is generally between 6 and 8 cents. There's not a contractual standard yet for artist royalties on digital downloads (some labels impose a "new technology" deduction of up to 80 percent!), but it tends to be about a dime. (The top 10 songs on Billboard's new download chart, in its first week, were collectively downloaded only 7,229 times from systems including iTunes, Rhapsody, Listen.com and others; even the likes of Coldplay and Avril Lavigne might only be seeing a couple hundred bucks a week from downloads.)

That leaves around 50 cents for the record label. At this rate, the record labels on iTunes collectively stand to bring in only $13 million a year. Admittedly, only about 5 percent of American computers are Macs; if iTunes ran on PCs, too, and if PC users were high rollers like Mac users, total annual iTunes sales could run 4 percent or so of CD sales. But it might well have been cheaper for the RIAA to have devoted attention to its own disappearing product, and let Napster be.

 
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