Scholars’ Prediction of the Indie Music Industry – 1
As people are able to listen to music on the move, new consumption opportunities are created and consumers are willing to spend more time and money listening to music. I have written about this in detail in my blog Scholars’ Prediction of the Indie Music Industry. This contention is supported by the all-time high in album sales reached during the rise of sales in portable players. Yet, there appears to be little relationship between changes in format and the 2000-2002 dip, leaving the decline still unexplained. Another common theory relates to the effect of substitute entertainment products such as movies, DVDs and videogames. The concurrent rise of these two products from 1972-1999 provides evidence against this hypothesis. Considering the amount of time that it takes to consume these products also suggests different demand schedules. Interest in music at a certain time may also contribute to changes in sales. Interestingly, in attempting to use the concert industry as a proxy for interest in music, scholars find that the years 2000 and 2001 had the largest real increase in concert revenues—the same time the record industry was experiencing unusually large decreases in revenue.
Scholars created a regression model of physical music sales from 1998-2002 using a cross-section of the 16 countries with the largest markets for pre-recorded music. They define their independent variables as GDP, Downloads, Broadband, Digital Media Players, DVD Players and CD-R Players. Music scholars find that GDP has a strong positive effect on music purchases, although they admit this may likely capture other factors related to the domestic economic environment. Both the downloads and broadband variables are found to be negative and significant at the ten percent level. The -.2 coefficient on music downloads suggests that between the years of 1998-2002, music downloading could have caused a 20% reduction in music sales worldwide and provides strong evidence of MP3s substitutive value for CDs. As discussed in my blog Impact of Digital Sales on The Indie Music Industry, when CD sales continued their steep decline, as published in March 2009 article from Daily Finance, Apple was compelled to introduce a three-tiered pricing model. According to the model, iTunes started charging $1.29 for more popular songs. In doing so, iTunes was able to leave behind the digital rights management standard it first adopted in response to consumer preference and competing services without these restrictions, as documented by the New York Times in 2009. Today, in less than a decade, the iTunes music store has grown to an unimaginable size. It sold its 10 billionth song, establishing it at the top position among music retailers worldwide, as announced by Apple in 2010.
One important shortcoming in the above mentioned theory is the measurement of downloads, represented as the percentage of adults who have downloaded an MP3 illegally at least once. The lack of data on intensity of downloads and the omitted variables implied by the significance of GDP, though, leave the findings mostly inconclusive. Data until 2002 is also unable to include legal digital sales, now an important part of the industry, as no successful digital distributors had been fully established at the time.
Some scholars utilized time series regression analysis to try to explain the decline in record sales of indie music from 2000-2004. While previous studies had found price and substitutes insignificant, they note that CD prices rose 19.4% from 1998 to 2002 and that sales of videogames and DVDs have increased post-2000 (2005, 313). Another plausible explanation would be that the introduction of MP3s has altered the price elasticity of demand for recorded indie music. If indie music downloading serves as a substitute for these purchases, then the increasing price of indie music may have amplified the decline.
In my next blog I am going to discuss the effect of Apple and iTunes on the indie music industry, record labels and other digital services. Please share your experiences in the comments section and I will add them to my future blogs.
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