For digital-music fans, paying for downloads used to be difficult. But after years of uncontested dominance by peer-to-peer (P2P) file trading services like Napster and Kazaa, paid offerings are finally starting to make some noise.
The revolution started with iTunes, which finally gained some digital traction by offering a simple, $0.99-per-track download store. That resonated not only with die-hard Mac users, but also with Windows-based music fans. For Apple, the story keeps getting better, with over 150 million total downloads and new Stores spreading across Europe.
Apple made its splash in the Spring of 2003 in the US, joining existing services such as Rhapsody and MusicMatch. Now, at the tail end of 2004, the market is overflowing with competitors across the globe, including Wal-Mart, Napster, Microsoft, Virgin, and f.y.e. Still, Apple commands a 70 per cent market share of the paid market, according to data released this month by market research firm NPD Group. That has left other services playing catch up, with Napster grabbing an 11 per cent share and Musicmatch, RealNetworks and Wal-Mart each claiming 6 per cent of the market.
But how are the total paid-download numbers stacking up? Recently release figures from industry authority Nielson Soundscan pegged total 2004 paid downloads at 93,580,000 earlier this month. That compares to a very nominal figure of 19,200,000 for 2003, with tracking only starting in June.
While that is an increase of almost 400 per cent in just one year, the total amounts so far appear to be a splash in a bathtub. Well-known industry attorney Steve Gordon provides a little perspective on the space, noting that “total sales of all the iTunes singles adds up in income to approximately the same amount as sales of the first Nora Jones album.” And the figures look even smaller when placed in comparison to the number total files swapped on popular P2P networks, with network tracking and security firm BayTSP pointing to between three and five million downloads daily. That amounts to billions of file annually, utterly eclipsing the paid download market.
Music off the record
Most inside major record labels are hesitant to speak on the record about P2P networks. But several insiders note that while paid services like iTunes are great at grabbing headlines, P2P services mostly operate under the radar. Legitimate, paid services often hire professional PR organizations to maximize visibility, along with a flurry of special giveaways and artist exclusives. That may make the emerging legitimate market appear larger than it actually is, despite continued increases in P2P file sharing levels. Speaking at a recent conference sponsored by the Cato Institute, Eric Garland of P2P tracking firm BigChampagne noted that “there is an elephant in the room that no one is focusing on”.
With the P2P animal constantly growing, the Recording Industry Association of America (RIAA) took an enforcement lead by initiating lawsuits against file-traders last year. Those efforts, started in September of 2003, have continued at a consistent clip, with over 5,000 subpoenas now issued. That has led to enforcement action outside of the United States as well, with organizations like the International Federation of Phonographic Industries (IFPI) and the British Phonographic Industry (BPI) recently stepping up legal action against illegal file-swappers. According to RIAA president Cary Sherman, "A global problem requires a global response, and that is why the actions taken by our international colleagues are so welcome.”
But is the effort working? Sherman points to a growing awareness of the problems inherent in P2P file-sharing: “With all the spyware, adware, viruses, loss of privacy, unwanted pornography and the risk of getting caught for copyright infringement, people's behavior and attitudes toward illegal file-sharing are already changing”. But others, including the head of one of the largest P2P networks, think that organizations like the RIAA are pursuing the wrong strategy. "Their approach has been to attack the customers, the companies, and the revenue streams," says Sam Yagan, CEO of eDonkey, speaking recently to the Boston Phoenix. "If they had spent all that money and effort on making a deal with P2P networks, I think they could have co-opted the whole system by now."
Other voices, including those inside the record business, are echoing that sentiment. Comments Steve Gordon: “if the labels are going to recover they must do more to embrace the new technologies, especially P2P”. That includes legalizing P2P networks in return for blanket download licensing, similar to systems already in place for the public performances of songs. Other models have also been discussed at length, including statutory licenses that would legalize P2P file-sharing by placing a tax on the electronics and ISP industries. Those taxes would then be payable to the labels and the artists.
A second look
Perhaps the ice around P2P networks is thawing a bit. Speaking at a recent panel in Los Angeles, EMI senior VP of digital development and distribution Ted Cohen indicated that he is not adverse to the concept of P2P, noting that “people are coming in daily to pitch prospective P2P solutions, but it’s EMI’s job to protect artists from trading one bad situation for another.” According to Cohen, about 80 per cent of current traffic on P2P is pop-music hits, something that major labels have always taken notice of.
While Cohen is viewed as a digital front-runner, others who have traditionally been less tech-savvy are also taking another look at P2P. At a recent Billboard conference in New York featuring several east coast industry heavyweights, most seemed open to exploring new distribution models – including P2P.
While that sounds like the stuff of transforming business models, P2P applications still remain on an island of their own, with little major label collaborations emerging. And some, literally, exist on islands, with companies such as Sharman Networks (owner of Kazaa) headquartered on the small island of Vanuatu. That may insulate the company from pending legal action, but also makes above-board negotiations difficult. Still, some are hoping to make amends, with networks such as eDonkey now headquartered in Manhattan. That was a ballsy move for Sam Yagan, who repeatedly defied advise from lawyers to move off-shore.
But for some in the industry, paid music services just need a chance. While total paid sales are still insignificant when compared to total CD sales and P2P downloads, it’s important to note that people are actually starting to pay. That is better than zero, essentially where the market was at beginning of last year. And with major companies like Microsoft just entering the space, the market may be ready to take off in 2005. For an industry that is painfully adapting to the new digital realities, a substantial online sales story would be a welcome change.