The False Mathematics of the RIAA

[David Farber <dave () farber net>]

------ Forwarded Message
From: Barry Ritholtz <ritholtz () optonline net>
Date: Tue, 15 Feb 2005 07:04:59 -0500
To: <dave () farber net>
Subject: The False Mathematics of the RIAA

Hey Dave 

The feedback on the P2P downloading debate has been terrific; Let me add a
few additional bullet points into our repertoire of arguments:



The False Mathematics of the RIAA
http://bigpicture.typepad.com/comments/2005/02/the_false_mathe.html

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 -- OutKast¹s 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 net
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.

  


>

Sources: 
Balding Rockers and Big Money
JOHN LELAND 
NYT, Sunday, February 13, 2005
http://www.nytimes.com/2005/02/13/weekinreview/13lela.html

Napster-to-Go reviewed, math done
boingboing, Sunday, February 13, 2005
http://www.boingboing.net/2005/02/13/napstertogo_reviewed.html

Money Makers 
Robert Lafranco 
Rolling Stone, Posted Feb 10, 2005
http://www.rollingstone.com/news/story/_/id/6959138/prince?pageid=rs.Home&pa
geregion=single2 

The Effect of File Sharing on Record Sales: An Empirical Analysis
Felix Oberholzer, Harvard Business School
Koleman Strumpf, UNC CHapel Hil
http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf




Cheers, 



Barry L. Ritholtz  
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The Big Picture: Macro perspectives on the Capital Markets, Economy, and
Geopolitics   
(with a dash of music and film thrown in!)
http://bigpicture.typepad.com/comments

------ End of Forwarded Message

-------------------------------------
You are subscribed as lists-ip () insecure org
To manage your subscription, go to
  http://v2.listbox.com/member/?listname=ip

Archives at: http://www.interesting-people.org/archives/interesting-people/