Wednesday, December 31, 2003

Forget the spin, taping is not killing music

Despite its song and dance, the record industry is in rude health, says Peter Martin.

For many of us, this Christmas marked the return of the homemade gift. By that I mean the lovingly crafted personalised compact disc, a sort-of high-tech car tape filled with what the giver imagines are your favourite (perhaps illegally downloaded) songs.

A Record Industry Association survey suggests that an astonishing 40 per cent of us have received homemade CDs as gifts, typically four each during the past year.

The industry wants us to feel bad about this. It says we are guilty of theft (or at least of receiving stolen goods). When three university students were sentenced last month for their role in creating a music download site the industry claimed they should have been treated as common criminals. "Clearly, if you steal this much music from the store you go to jail," a spokesman said.

But creating CDs is different from stealing CDs from a store, and the industry's figures bear this out...

The recording industry survey was carried out by Quantum Market Research using a sample of about 1000 people. It suggests that 31 million homemade CDs are given away as gifts each year (about four for each of the eight million Australians it says receive them). If, as seems reasonable, 31 million homemade CDs are kept rather than given away, the total number created each year would top 62 million.

When something is stolen there is normally something missing. A dent of 62 million in CD sales in stores each year should be easy to spot. Except for this problem. CD sales in Australian stores have hardly ever been that high. They peaked at 63 million in 2001.

If, as the industry suggests, each of the CDs made on a home computer was indeed created at the expense of one sold in a store the entire industry would have been wiped out.

In fact while 2001 was the industry's best year on record, 2002 was its second-best year, with sales only a few per cent lower.

So don't feel too guilty. The homemade CD appears to have brought us the best of both worlds - doubling the number of new CDs in circulation, without much harming sales in stores.

(The record companies will not like me saying this. They will make the point that the dollar value of CD sales is the lowest it has been since 1998, but that is because prices are lower, thanks in part to Allan Fels. The number of CDs sold is higher than it was back then, thanks in part to Norah Jones, Delta Goodrem and now Guy Sebastian.)

If the healthy state of CD sales in the face of massive do-it-yourself competition surprises you, you are in good company. Midway through last year the Chicago University economist Stan Liebowitz was warning of annihilation. The recording industry loved him for it. He said large-scale unauthorised copying could soon make it obsolete.

Liebowitz has since had a change of heart. In a new study entitled Will MP3 Downloads Annihilate the Record Industry? he concedes that the evidence for annihilation has failed to materialise. He says that "given the enormity of the whole MP3 download enterprise [as in Australia, roughly one song is downloaded for each song sold through stores] it should be easy to recognise its impact on album sales if the impact is large".

He concludes that the impact has not been large and says his best guess is that the worst of it is over, given that most homes that would want CD burners now have them.

CD sales in the US have fallen 20 per cent, but from an extraordinary high. Liebowitz says that during the history of the vinyl LP, sales rarely exceeded two per US citizen a year. Prerecorded cassettes did better - sales peaked at about 2.5 a citizen. Sales of CDs peaked a few years back at more than five per citizen a year. Even now US citizens buy more than four CD albums each a year, roughly twice as many as they ever did in the days of the vinyl LP.

The reason is that home taping, cassettes and CDs have made music more portable. In the days of the vinyl LP you were limited to listening in one room (usually the lounge room) and you certainly could not listen in your car. The advent of the cassette tape increased the amount of minutes available each day to listen to recorded music.

As a result the demand for recorded music went up, whether in the form of LPs which could be taped onto cassettes or in the form of prerecorded cassettes. The 1980s industry sticker "Home taping is killing music" couldn't have been less accurate.

The recording industry and its brethren have been crying wolf for years. At various times we have been told that the pianola was going to kill sales of sheet music, that radio was going to kill sales of records, that photocopying would kill sales of books, that the VCR would stop people going to movies, and that cheaper imported records would stop people buying Australian music.

Along the way we have been told that the use of the latest technology was immoral - everything from the photocopier to the cassette recorder to the VCR.

Liebowitz says we are in the middle of a "wonderful natural experiment" which will determine fairly quickly whether the latest high-tech copying machine causes the sort of damage the other machines didn't. He adds that from an economist's point of view it would be no real disaster if it did. The present recording industry would be replaced by something better able to make money in the changed environment.

But all the indications are that the recording industry we know will be around for quite some time yet - side by side with homemade CDs. In Australia CD sales through stores rebounded 5 per cent in the first half of 2003. The figures for the second half may well show Guy Sebastian has pushed the industry towards a near-record Christmas.

Peter Martin, a former Treasury official, is the economics correspondent for SBS Television.