The RIAA says that illegal downloading and burning of CDs is partly to blame for the music industry's difficult year in 2001, and consumers remain unwilling to pay for online music. Can you say impasse?
Fewer than 10 percent of Americans over the age of 12 who have downloaded music off the Internet have ever paid for it, and most of them are unlikely to begin paying anytime soon, according to a study by Ipsos-Reid.
Using the 2000 U.S. census figures, the 8 percent of Americans over 12 who downloaded and paid for music comes to a meagar 4 million people – not good news for online music ventures. In addition, 84 percent of those who have downloaded music without paying said they would be unlikely to pay for streaming or downloading music off of the Internet, even if there was no free music available.
"This suggests there may be resistance among current downloaders to the initial legitimate fee-based online music services recently launched by the major recording companies," said Matt Kleinschmit, senior research manager for Ipsos-Reid. "There currently appears to be a segment of the downloader population that has a fundamental objection to the idea of paying for music downloads or streams obtained from the Internet."
There is still plenty of life in the legitimate music industry, however. The Ipsos-Reid study found that despite the apparent desire for free (and often illegally posted) music, downloaders do not stop buying prerecorded compact discs when they discover downloading. In fact, 81 percent of downloaders report their CD purchases have stayed the same or even increased since they initially began downloading music from the Internet.
Downloaders also appear to have a voracious appetite for online music-related information, as 84 percent report also using the Internet for more than just downloading, such as listening to song clips, reading about lyrics and tour information and researching bands prior to actually purchasing their CD. Nearly half (47 percent) of these individuals indicate that they have subsequently purchased a particular CD from a band or artist solely because of something they first read or listened to on the Internet.
Not that any of these numbers seem to matter much to the recording industry. According to the Recording Industry Association of America (RIAA), the number of units shipped domestically from record companies to retail outlets and special markets (e.g., music clubs and mail order) fell 10.3 percent in 2001.
"This past year was a difficult year in the recording industry, and there is no simple explanation for the decrease in sales. The economy was slow and 9/11 interrupted the fourth quarter plans, but, a large factor contributing to the decrease in overall shipments last year is online piracy and CD-burning," said Hilary Rosen, president and CEO of the RIAA. "When 23 percent of surveyed music consumers say they are not buying more music because they are downloading or copying their music for free, we cannot ignore the impact on the marketplace."
RIAA's own survey of 2,225 music consumers between the ages of 12 and 54 conducted by Peter Hart Research Associates, found that 23 percent of those music consumers surveyed said that they did not buy more music in 2001 because they downloaded or copied most of their music for free.
The Ipsos-Reid research found that an opportunity appears to exist for record companies to use the Internet to introduce consumers to new sounds. Nearly one-third (29 percent) of American downloaders indicate that their typically preferred genre of music has changed since the inception of their downloading behaviors, and 21 percent of downloaders ages 12 and over report that their radio listening activities have also changed since they began downloading.
"Clearly, the Internet is becoming a key component in both the listening and purchase activities of some music enthusiasts," Kleinschmit said. "They are taking advantage of the World Wide Web as a resource for both obtaining and researching music, and then often putting this newfound knowledge to use in offline venues. Many of these individuals appear to be looking to the Internet as a way to discover new bands and sample different types music prior to making a traditional retail purchase."
Research by International Data Corp. (IDC), meanwhile, found that an opportunity exists for label-backed, independent fee-based music service providers (MSPs). According to IDC's report, "Music Service Providers Forecast and Analysis of the U.S. Market for Paid Online Music, 2000-2005," MSPs will begin to grow steadily in 2003 and reach revenues of $1.6 billion by 2005, but those with the best chance at success will need to provide content from most, if not all, music labels at a reasonable price.
"There's a growing population of music enthusiasts that are ready to embrace paid downloads, streaming on demand, and online radio," said Susan Kevorkian, analyst with IDC's Consumer Devices and Technologies service. "The critical factor, of course, is the content. The MSPs most likely to succeed will offer a wide variety of music (on par with traditional music stores) that can be transferred to MP3 players or burned to recordable discs. If an MSP doesn't have a strong content offering, it may as well close up shop."
IDC expects that the majority of paid MSPs will have subscription-based business models. They will also partner with consumer portals, ISPs, wireless service providers and retail Web sites, among other third-party, consumer-facing entities for distribution.
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