Is the slowdown of digital sales and the rise of free services a sign of the longer term impact of P2P?

The consequences of years of file sharing are, according to the recorded-music industry, pretty much evident in most countries with sales significantly lower than they were a decade ago. This is made very clear in the new IFPI Digital Music Report published earlier today. Legal online and mobile services continue to pit their wits against P2P networks that offer a similar experience but at no cost. Convincing music users to opt for legal alternatives is a difficult enough task in itself, but is the advertising-supported model doing more harm than good by reinforcing the conditioning of consumers that music should be free?

In most cases, when a consumer finds a product that is cheaper than the one they usually buy, but is also of equal quality, they opt for the cheaper version – no surprise there. The rise of physical recorded-music sales online is a simple example of this. Online stores offered CDs much cheaper than their bricks-and-mortar equivalents and so online retailers quickly gained market share. Over a period of time, a large number of consumers made the switch permanently and so bricks-and-mortar retailers were forced to price music at lower levels in an attempt to win consumers back.

Another example of changing habits has seen the replacement of physical recorded-music by digital. In most cases this has seen consumers switch to file sharing rather than to legal services. A large number of studies published in recent years have claimed to prove a link between lower sales and file sharing with a small number suggesting the opposite is the case and greater access to music has resulted in higher sales.

A long list of other factors makes the pinning of the sales decline solely on file sharing a little speculative. For example, the birth of file sharing coincided with the completion of the shift from analog formats to the CD in most developed markets, making a fall in sales more likely. In 1981, unit sales of the vinyl LP album peaked at 1.14 billion and the LP was soon replaced by the audiocassette as the album format of choice. But in 1982, global album unit sales decreased, before rising again the following year. Similarly in 1997, despite a rise in the level of CD sales, the larger fall in audiocassette sales resulted in an overall album unit decline. Although album unit sales rose in 1998, no new ‘replacement’ album format meant unit sales peaked in that year and have fallen annually ever since.

Competition from other entertainment sectors will also have impacted on music sales. But the switch away from physical formats to digital, seen in the context of format shift, is a repeat of a process established in the music industry more than 30 years ago. Although no legal alternative was available at the time, access to the “new format” was provided by P2P networks. Whereas previous format shifts have resulted in consumers paying more for a better quality product, the consequences for the music industry of switching to digital have been far more complex and damaging.

Despite legal digital services making gains each year and fresh innovation resulting in the development of new business models, a large number of consumers have become conditioned to the process of accessing music for free and tempting them back into paying for music is proving difficult. Moreover, so many of the new innovations in the last 18 months or so have centered on providing music for free with advertising paying for the use. Advertising-funded services have provided a popular alternative to file sharing, but in some extreme cases they have succeeded at the expense of other digital services. In Spain, for example, the retail value of streaming and subscription services rose by 335% to €7.9 million (US$10.5 million) in the first six months of last year. This contrasted with a fall in retail sales of online and mobile downloads.

How to convince consumers, that have acquired music for free for several years, to now pay for it is a difficult proposition. Certainly the advertising-funded model has a part to play, but there is a real danger that this will simply reinforce the conditioning of consumers that content should be available for free. Low conversion rates by music streaming services from the basic advertising funded tier to a premium level with a price tag is testament to this.

But despite the fact that so much music has been accessible for free for so long, research shows that there is a large pool of consumers that are willing to pay for music, but are currently not being served by any of the available digital services. Although this should provide some optimism for the music industry, the stagnation of download sales in the US and Japan has led to an increased urgency to establish precisely what it is these unsatisfied consumers are willing to pay for.