We'd Rather Fight Than Switch: Music Industry in a Time of Change

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INTRODUCTION

The game was on, with the Recording Industry Association of American (RIAA) using a full-court press. Tanya Andersen of Beaverton, Oregon, was accused of illegally downloading music files over the Internet (Ward, 2007). Ms. Andersen, a 42 year old mother of a 10 year old daughter, was allegedly downloading gangsta rap songs at 4:00 in the morning; a music genre she knew nothing about. When Ms. Andersen contacted the RIAA to report an error, she was informed that unless she paid a "$4,000-$5,000" settlement that "she would be ruined financially." (Ward, 2007, p. 14). Further, Ms. Andersen was advised to pay even though the person at the RIAA support center believed she was innocent of the alleged crime (Ward, 2007, p. 14). So aggressive was the RIAA in the pursuit of Ms. Andersen, the industry association attempted to contact her 10 year old daughter at school by "pretending to be her grandmother (Ward, p. 15 2007)." Clearly the RIAA had entered a new realm where being customer-focused took on a whole new meaning.

From the RIAA's perspective music downloading was the equivalent of illegal drug trafficking, where the focus was on prosecuting the user rather than taking out the distributor (Butler, 2007). According to RIAA senior vice president for communications, Jonathan Lamy, "We can identify the IP addresses associated with the user engaging in illegal activity, [and the Internet Service Provider] is able to match a specific IP address with the account holder (Ward, 2007, p. 15)." It is an open and shut, ironclad case with the RIAA taking the moral high ground; Lamy continued,

"Our companies have every right to protect their product, just as those who have been robbed have every right to claim damages for what was stolen from them. This process is simply a means to an end--that is communicating the message that illegal downloading has consequences and encouraging fans to turn to any one of the great legal ways to enjoy music." (Ward, 2007, p.15)

THE INTERNET AND RECORD INDUSTRY BACKGROUND

The Internet has been characterized as a disruptive technology, changing the way in which companies do business across a variety of industries. Disruptive technologies work to undermine a successful business model, or product offering (Keller and Shanklin, 2007). It could be said that the Internet is a great leveler, allowing smaller firms to effectively compete against larger, market controlling firms; or, consumer markets to have a louder voice in how companies satisfy their needs.

Music is consumed equally by men and women all ages, 43 percent are under age 30 (see Exhibit 1). Eighty-five percent of music consumers purchase full length CDs, with a majority (79 percent) purchasing through retailers or record clubs (see Exhibit 1). As of 2006, just 16 percent of consumers report obtaining their music, legally, through the Internet or digital downloads.

Since 1999 the Internet has allowed consumers, mostly under age 30, to significantly alter their music consumption behavior. Some felt that illegal downloading grew in popularity as a "revolt against over-priced and inferior products (Fiely, 2003, p. 1)." The Internet is changing the music industry for good, turning a decades-long distribution model on its head. Exactly how much downloading is taking place, legal and illegal, and its growth or decline are open to debate depending on the data sources used. In 2003 it was estimated that over 60 million Americans were using file sharing services (Metz, 2004). It is thought that almost all of these users were illegally downloading music (Fiely, 2003).

Since the beginning of production and marketing music, major labels sought out musicians for exclusive recording contracts with a focus on producing and distributing CDs that would generate large profits. Throughout the 70s, 80s and 90s the recording industry experienced consolidation. The big five recording companies, including Sony, EMI, and BMG, controlled the talent and as a result what consumers would listen to. Music was either consumed via the radio or on physical CD-ROMs. Despite consumer dissatisfaction, the RIAA asserted that CDs were a better music value than ever when compared to other forms of entertainment (see Exhibit 2), the average list price of a CD dropped almost 31 percent between 1983 and 2006 (RIAA, 2007).

The Internet changed everything as young people investigated the excitement and freedom of music downloading. First, they converted personal music libraries to digital formats to create their own CD mixes; a behavior no different than making tape recordings of music on vinyl albums.

Then, Napster was created in 1999. It was the original peer-to-peer (P2P) network that allowed users to share files over the Internet. An instant success, the P2P network concept burned through the marketplace like wildfire. The music industry claimed that illegal downloading was responsible for the loss of $4.3 billion in worldwide revenue each year (Sorkin, 2003). Consumers felt that being "ripped off" by overpriced CDs justified their illegal downloading activities (Dvorak, 2004).

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Data compiled by the RIAA showed an increase in physical CD sales until 2000, with revenue peaking at $13.2 billion. Since 2000, unit sales of CDs declined by 35 percent, with revenue declining by 31 percent (see Exhibit 3). Between 2004 and 2006, sales of "legal" music downloads increased 379 percent to $878 million (see Exhibit 3). As far as the RIAA was concerned, illegal music downloading was responsible for the dramatic decline in CD sales (Gross, 2004). Terry McBride, CEO of the Nettwerk Music Group, questioned the music industry assumptions citing the following reasons for CD sales decline: 1) competition from other entertainment, 2) replacement cycle for music is over--digital doesn't scratch, 3) consumers prefer the great songs without the filler, 4) mass merchant retailers carry lower inventory due to narrow product …