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The False Mathematics of the RIAA
Posted By Barry Ritholtz On February 15, 2005 @ 7:05 am In Finance,Music | Comments Disabled
The feedback on the P2P downloading debate  has been terrific; Let’s add a few additional bullet points into our repertoire of arguments:
First, let’s consider what actual P2P losses are to the industry.
They are much more difficult to calculate than the RIAA would have you believe. Why? First, downloaders pull songs they would never buy; I have Outkast’s "Hey Ya " somewhere; I consider it a goofy novelty song, and the only reason I have it is that someone else sync’ed it to a Peanuts animation (everyone on stage dancing to Schroder’s piano). It was an amusing but unauthorized use, which I downloaded, smiled at, and never saw again.
Oh ya: The CD that song came from — OutKast’s 2003′s release, Speakerboxxx/The Love Below  — sold 10-million plus copies.
Lost sales? Hardly.
Consider the biggest of all downloaders — mostly-broke college students. They have a computer their parents bought them, and the campus gives them a big, fat pipe. They get access to music they would never have bought, resulting in future post-college sales. But the one-to-one lost sales argument is transparently false.
Next, let’s consider what the damages to the industry are. Consider the issues of substitution: What would it cost to purchase an "unlimited amount" of digitally distributed music? The answer is found in the Napster-to-Go  model:
"The Napster to Go model . . . shows that the RIAAs claims of a lost sale for every download to be demonstrably false. If you can download an unlimited number of songs via napster and play them for as long as you continue to subscribe, then the maximum loss the RIAA suffers from a single downloader cannot exceed $15/month no matter how many songs a person downloads." — via boingboing 
Over the course of 10 years, that represents total gross losses of $1,800, of which Napster keeps between 15 and 20%. Net loss: $1,500 dollars.
But wait, there’s more: The Rhapsody Music Subscription  from Real Networks charges only $10 per month . That’s $120 per year. Over a decade, the loss downloaders present to the industry by not signing up for Rhapsody are: lost revenue of $1,200 (gross). In other words, the total net industry losses are ~$1,000 per decade. Hardly as apocalyptic as portrayed.
By approving the Napster/Rhapsody subscription models, the music industry has unwittingly created a viable legal defense, at least when it comes to damages portion of their litigation, for defendants in a RIAA P2P litigation. The claims of losses in the $100,000 or even $10,000 are silly — as long as this $1,000 net loss per decade option exists.
Of course, that doesn’t consider studies (such as the one from Harvard/UNC CHapel Hill ) that shows P2P drives CD and concert ticket sales. I only buy music that I hear
and like. Since that hardly happens via the radio anymore, P2P is
my most common source of new music (that, and Apple adverts ).
Further, the industry’s disingenous claims that its the artists are getting ripped off by downloaders are rather misleading. (Putting aside the industry’s own long and storied history of ripping off their artists for another day).
A recent NYT  article reveals that most musicians make their bread and butter not by selling CDs, but by touring and performing:
"According to a new list of the 50 top-earning pop stars published in Rolling Stone , over the hill is the new golden pasture. Half the top 10 headliners are older than 50, and two are over 60. Only one act, Linkin Park, has members under 30.
The annual list, which entails some guesswork, reverses the common perception of pop music. Not only is it not the province of youth; it’s also not the province of CD sales, hit songs and smutty videos.
While sexy young stars take their turn strutting on the Billboard charts or MTV – or on the cover of Rolling Stone – the real pop pantheon, it seems, is an older group, no longer producing new hits, but re-enacting songs that are older than many of today’s pop idols."
This has serious financial repurcussions for the business model the industry is presently wed to. And the list of artists who are making the big bucks reveals industry mismanagement has led to mostly ignoring the key economic demographic driver of our century: The baby boomers.
Here’s a little secret the RIAA would rather not have you know: Musicians make most of their money performing and touring — not selling CDs or downloads. Rolling Stone has a detailed analysis  of the top 50 acts . . . here’s a top 10 list to whet your appetite:
2004 Music Money Makers
1. Prince $56.5 MILLION
2. Madonna $54.9 MILLION
3. Metallica $43.1 MILLION
4. Elton John $42.9 MILLION
5. Jimmy Buffett $36.5 MILLION
6. Rod Stewart $34.6 MILLION
7. Shania Twain $33.2 MILLION
8. Phil Collins $33.2 MILLION
9. Linkin Park $33.1 MILLION
10. Simon and Garfunkel $31.3 MILLION
Note that 9 of the top 10 grossing performers aren’t the hot new thing — they are the better known rock classics — which the labels have mostly also been paying little attention to for so many years.
The industry can scapegoat P2P for all their woes, but a closer analysis of the math demonstrates the claim is illusory. (Mis)management is the primary sources of the industry problems.
UPDATE FEBRUARY 16, 2005 11:13am
Apparently, viewers didn’t think much about the Grammys; What does that say about this industry?
If you keep suing your customers, then soon no one will be watching this show . . .
Balding Rockers and Big Money 
NYT, Sunday, February 13, 2005
Napster-to-Go reviewed, math done 
boingboing, Sunday, February 13, 2005
Money Makers 
Rolling Stone, Posted Feb 10, 2005
The Effect of File Sharing on Record Sales: An Empirical Analysis 
Felix Oberholzer, Harvard Business School
Koleman Strumpf, UNC CHapel Hil
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2005/02/the-false-mathematics-of-the-riaa/
URLs in this post:
 P2P downloading debate: http://bigpicture.typepad.com/comments/2005/02/debate_on_downl.html
 Hey Ya: http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewAlbum?playlistId=3640667&selectedItemId=3640353
 Speakerboxxx/The Love Below: http://www.amazon.com/exec/obidos/ASIN/B0000AGWFX/thebigpictu09-20/002-8088463-8433620
 Napster-to-Go: http://www.napster.com/ntg.html
 boingboing: http://www.boingboing.net/2005/02/13/napstertogo_reviewed.html
 Rhapsody Music Subscription: http://www.rhapsody.com/listenhome.jsp
 $10 per month: http://www.rhapsody.com/faq.jsp?sect=main
 Harvard/UNC CHapel Hill: http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf
 Apple adverts: http://bigpicture.typepad.com/comments/2005/02/new_music_radio.html
 NYT: http://www.nytimes.com/2005/02/13/weekinreview/13lela.html?ex=1266037200&en=a0ed66d55605a1ab&ei=5090&partner=rssuserland
 Rolling Stone: http://www.rollingstone.com/news/story/_/id/6959138/prince?pageid=rs.Home&pageregion=single2
 Viewers Click Off the Little Golden Gramophone : http://www.washingtonpost.com/wp-dyn/articles/A24838-2005Feb14.html
 Housewives’ cleans up on Grammys: http://www.nydailynews.com/entertainment/story/280865p-240715c.html
 Grammys show suffers ratings dive: http://news.bbc.co.uk/1/hi/entertainment/tv_and_radio/4266423.stm
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