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Numbers Don't Lie: The Music Industry Still Doesn't Understand Technology or Piracy

By Adam Levy – Feb 7, 2014 at 8:43AM

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Can an app stop piracy or declining music revenue? Probably not.

An app that stops piracy.

Well, not exactly, but a new app from the Office of Intellectual Property and lobbyist group UK Music aims to educate young music fans about the impact of piracy on their favorite bands. The virtual experience puts users in charge of their own emerging band, managing their careers, and showing the effect of piracy on their financial results.

My Motown Funk artist. Source: Music snapshot

This feels so much like your dad trying to be cool, and it's emblematic of how out of touch the music industry is with its own product.

In the last 15 years, technology has shifted the way we consume music more than it did in the previous 50 years. Piracy is just a small issue for the recording industry. And it's not a problem unique to music anymore.

Television, particularly Time Warner's (TWX) HBO and Netflix (NFLX 0.94%), suffer immensely from piracy and account sharing. Unlike the music industry, however, these companies continue posting excellent results. They take different approaches, but they both work. The music industry isn't taking either.

How big of a problem is piracy?
In short, nobody really knows.

The problem, however, appears to have reached its height. Last year, one study found that illegal music downloads fell by one-third in the UK as streaming sites like Pandora Media (P) and Spotify offer strong alternatives to downloading.

Source: Flickr user m.a.r.c.

Additionally, there's a misconception that every song downloaded illegally could have translated into at least some revenue for the record companies. Considering that same study found that 75% of illegal downloads are done by 2% of digital pirates, that idea seems farfetched. There's no way such a small number of pirates are willing to pay even a small price for all of that music. Even on the all-you-can-listen music buffet that is Spotify, the record industry is only compensated when a user actually listens to a song.

More importantly, music pirates are, ironically, often some of the industry's biggest supporters. A study by the European Commission found that illegal downloads had little to no impact on digital music sales. A separate study by OfCom found that when you include spending on concerts, merchandise, and physical media, illegal downloaders spend more. Those pirates are also more willing to pay for subscription services.

The shift to subscription
Music downloaders' willingness to subscribe to services shone through in 2013. The number of songs that people streamed in 2013 doubled in the UK and increased 32% in the U.S. In the first nine months of Pandora's fiscal year, the company increased listener hours 23% despite a huge base and self-imposed limits for part of the year.

Indeed, music streaming is becoming the savior of the industry, but music executives and artists aren't happy. Pandora is constantly under attack for not paying artists enough despite the fact that it can barely turn a profit itself. Spotify, too, is under attack from artists, and even went so far as to create a website showing how artists are compensated based on song plays and premium subscriptions.

Source: Spotify

As these streaming alternatives gain popularity, more lucrative media are seeing declining sales. CD sales fell 14.5% in the U.S., which is an acceleration from 2012's decline of 12.8% and 2011's 5.7% decline.

More interesting, however, is the fact that digital music download revenue declined for the first time in history last year. Just 10 years after iTunes disrupted physical music sales, the digital download industry is already seeing the effects of disruption. No piracy education app is going to fix that!

Embrace it
Perhaps the music industry could take a cue from two companies that are constantly battling illegal downloads.

HBO has famously taken a hands-off approach to piracy. The Game of Thrones finale was downloaded 5.9 million times via BitTorrent, and HBO Go account sharing is all but expected. On the company's second quarter conference call, CEO Jeff Bewkes remarked, "Game of Thrones is the most pirated show. Now that's better than an Emmy."

In other words, HBO is focusing on making content so good people will resort to stealing it if access through other means is limited. Conversely, 2013 was a bad year for music.

Netflix, while focused on curating better content and producing its own Emmy-winning series, is also taking steps to extract more revenue from those who share accounts illegally by facilitating it. Last year, the company released a streaming plan that allowed up to four simultaneous streams. Although it's ostensibly targeted at large families, the real impact is seen on account sharers, who may see value in adding streaming capacity.

That's right, facilitate it!
Instead of fighting illegal downloads with a mobile game, the music industry needs to lead the way in facilitating access to its product. Letting technology companies innovate and then demanding more money from them is a flawed business model. If it owns distribution, it can better monetize it.

It can also use technology -- for example, Pandora's Music Genome Project -- to find and promote better content instead of the same formulaic songs. There's a plethora of great music out there, and it's a shame that most of it goes undiscovered.

The music industry has always fought change to its product that improved access. Cassettes posed a threat for their ability to record music off the radio. CDs never wore out, so replacement sales would rarely materialize. CD burners allowed for perfect copies, and mp3s and the Internet made sharing music even easier. Now, streaming gives people on-demand access to any song they want, anytime, anywhere ... and the music industry isn't happy with it.

It's about time the music industry starts working with technology companies instead of against them.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Netflix and Pandora Media. The Motley Fool owns shares of Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Netflix Stock Quote
$308.42 (0.94%) $2.86
Pandora Media, Inc. Stock Quote
Pandora Media, Inc.
Time Warner Inc. Stock Quote
Time Warner Inc.

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