According to Reuters, an Informa Media report says that global Internet music sales from retail websites will increase from $1.1 billion last year to $3.9 billion by 2008.
That number includes such CD retailers as Amazon (NASDAQ:AMZN), Best Buy (NYSE:BBY), and Overstock.com (NASDAQ:OSTK), as well as download services such as Apple's (NASDAQ:AAPL) iTunes. At the same time, the value of lost Internet sales due to piracy -- CD-burning and MP3 file-sharing -- will double from $2.4 billion this year to $4.7 billion.
Hmmm. That sounds like a problem. But let's visit the economics of reality for a second.
What's happened with the advance of the Internet and technology is that cost of acquiring and distributing music has declined dramatically, particularly for pirates. But up until recently, music companies have spent more time filing lawsuits and alienating listeners than passing on the benefits of technology. Thusly, the economics for listeners are different than for music companies.
I am doubtful that music listeners would have otherwise paid an extra $2.4 billion in music this year in the absence of CD-burning and file-sharing.
But things are changing. In a step towards promise, the industry is no longer bent solely on whining and litigation. Music companies have started to cope with the economic reality by creating value and slashing prices.
For example, Metallica released St. Anger this summer under Time Warner's (NYSE:AOL) soon-to-be jettisoned Elektra label. Included in the package at no additional cost was a studio performance of the entire album - on DVD video! Similarly, Vivendi Universal's (NYSE:V) Island Def Jam Group just released DMX's Grand Champ with a live video on DVD.
Furthermore, a few weeks ago, Vivendi's Universal Music Group -- the parent of Island Def Jam -- announced that it would reduce its manufacturer suggested retail price on its top-line CDs from $16-$18 to just under $13. The amazing thing about that, though, is that it wasn't done sooner -- especially considering that the cost of pressing CDs is measured in pennies.
Call it piracy. Call it theft. But the economic reality of net piracy has shortened the economic profit of music companies and is finally forcing them to deliver value.
You can reach Jeff Hwang at [email protected].
