By George Ziemann
December 11, 2002

The sky is falling! The music industry is doomed! Woe is everyone. The pirates have stolen all the gold. What will we ever do? How can we possibly recover? You've poured water on us and we're melting!

Let's quote a few of the RIAA's statements. The first quote comes from the report on 2001 year-end shipments. The title -- "Recent study Illustrates Internet Piracy's Impact on Music Market"

WASHINGTON-The Recording Industry Association of America (RIAA) announced today that the number of units shipped domestically from record companies to retail outlets and special markets (music clubs and mail order) fell 10.3 percent in 2001.

Specifically, total U.S. shipments dropped from 1.08 billion units shipped in 2000 to 968.58 million in 2001-a 10.3 percent decrease. The dollar value of all music product shipments decreased from $14.3 billion in 2000 to $13.7 billion in 2001-a 4.1 percent decrease, according to figures released today by the RIAA.

"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."

Time out. Total number of units fell 10.3 percent. Total sales dropped 4.1 percent. Sorry, Hilary, there is a simple explanation -- The economy sucks, you guys raised prices anyway while promising to copy-protect everything and make it harder to listen to. The consumer took a step back.

And here is another contributing factor, from their article, "The Value of a CD". Last time I looked, this was the top story on the RIAA home page.

Of course, the most important component of a CD is the artist's effort in developing that music. Artists spend a large portion of their creative energy on writing song lyrics and composing music or working with producers and A&R executives to find great songs from great writers. This task can take weeks, months, or even years. The creative ability of these artists to produce the music we love, combined with the time and energy they spend throughout that process is in itself priceless. But while the creative process is priceless, it must be compensated. Artists receive royalties on each recording, which vary according to their contract, and the songwriter gets royalties too. In addition, the label incurs additional costs in finding and signing new artists.

Once an artist or group has songs composed, they must then go into the studio and begin recording. The costs of recording this work, including recording studio fees, studio musicians, sound engineers, producers and others, all must be recovered by the cost of the CD.

While this is true, all of those costs will be fully recovered from the record company out of the big 8 cents per song the artist gets paid But that's another argument for another day. Here's the interesting part.

Another factor commonly overlooked in assessing CD prices is to assume that all CDs are equally profitable. In fact, the vast majority is never profitable. Each year, of the approximately 27,000 new releases that hit the market, the major labels release about 7,000 new CD titles and after production, recording, promotion and distribution costs, most never sell enough to recover these costs, let alone make a profit. In the end, less than 10% are profitable, and in effect, it's these recordings that finance all the rest.

I was very happy to see them provide this information, because after compiling the RIAA's market data, I had noticed that the "new releases" data which had been present in all of the information from 1992 to 1999 had somehow been overlooked when the RIAA put together the 2000 and 2001 summaries.

So the record industry cut their inventory (and artist investment) by 25 percent and sales only dropped 4.1 percent, even though the economy is at rock bottom. There were almost 12,000 fewer new releases for the consumer to choose from in 2001 than 1999. The record companies are making more money per release than ever.

According to recent surveys among a total of 2,225 music consumers between the ages of 12 and 54, commissioned by the RIAA and conducted by Peter Hart Research Associates, 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.

Some have questioned whether downloading results in sales displacement. In addition to the actual claims of the consumers about their own buying patterns, there has also been explosive growth in the copying of that downloaded music onto a burned CD or a portable mp3 player. In the 2001 survey, over 50 percent of those music fans that have downloaded music for free have made copies of it. Just two years ago, only 13 percent copied it onto a portable device or a CD burner.

Up until two years ago, modems were too slow to download music. Duh. Did anyone ask these consumers if they were downloading major releases or freely uploaded Independent music? If it was the latter, that's exactly what we want the consumer to do. If piracy is the problem, why is it that sales didn't start declining until AFTER the RIAA had Napster shut down?

Let's see how the "sales displacement" theory holds up under scrutiny, using the RIAA's own statistics. All of these figurs came from the RIAA's web pages, with the exception of Average Unit Price, which was calculated based on figures given. Some of the 2001 data was not included on the site either and had to be extrapolated from what information was provided.

Okay, sales are down 6 percent over the past two years. Considering the economy, that doesn't seem like such a serious problem. I'd also say that pushing the average price (these figures are net after returns) over $14 a unit probably didn't help any, either.

If the record industry had gone forward with the 12,000 releases that it cut back over the past two years and only sold 3,000 copies of each title (a loser in record company terms), both the units shipped and total sales would have continued to climb as they had in previous years.

Here are Hilary Rosen's concluding remarks on the state of affairs at the end of 2001.

"Global piracy on the physical side costs the recording industry over $4 billion* a year. That doesn't even include losses on-line. While the physical piracy problem is not new, our markets continued to expand. Now that consumer purchasing is threatened as well, the impact of all piracy is greater." concluded Rosen.

The source of the $4 billion figure is attributed to "IFPI, the international association representing the recording industry worldwide." Good thing she passed that one off on someone else. I just don't see where the justification for that figure could possibly come from. The numbers are simply not there. In short, this is total bullshit.

But wait. Something is missing from the 2001 statistics, at least the ones I could find. Singles. For some reason they stopped reporting this information. The reason is obvious. The single is dead. This is what the record companies are screaming "pirate" about. This is the product that the Internet has killed. And yet, this comes nowhere near the fictitious $4 billion in "lost sales" mentioned above.

Disproving the theory that "You'll never go broke underestimating the intelligence of the American public" (P.T. Barnum ??), U.S. buyers have apparently come to the realization that $3.50 to $5.50 is too damn much to pay for one song.

You'll note that, even with the 1992, 1996 or 1997 figures, it would take 10 years for this to add up to the $4 billion in "piracy losses" that someone is pulling out of the air (or a somewhat lower area from which things like this are known to emerge). Hilary Rosen is going to have an even tougher time trying to explain what's going to happen next without making the tale of pirates sound even more like the fictional account than it is.

Before I continue, however, if anyone spots an error in the charts above, let me know and I'll correct them. As I said, some data was extrapolated. If you've got a real number, let's hear it (and the source). Not that's it going to matter much. The record companies are going to realize that the pirates are not the consumers that downloaded a few mp3s. The real pirates are coming and they're going to do more than steal a few songs from you.

We're going to tear down your castle walls.

Independents' Day

I am hereby declaring July 4, 2003 as Independents' Day.

On that date, MacWizards Music is going to offer a record contract to every act that appears at the IndiePie event. The basic terms are going to look something like this. Maybe not exactly, but as close as I can get to it:

• Term of contract - One release, non-exclusive
• Copyright owner retains all rights to exploit the work in whatever manner they see fit.
• CD retail price will be $9.98 or less.
• Royalties
  • While actual non-inflated production costs (pressing and printing -- NOT studio costs, mastering, etc.) are being recovered, income from sales will be distributed as follows:
    • An "Investor" (possibly but not necessarily MacWizards Music -- could even be the artist) gets 25 percent to apply against the production costs. Of the remaining 75 percent:
      • MacWizards Music gets 12.5 percent for being the record label
      • The "Investor" gets 12.5 percent for putting up the cash in the first place.
      • The artist gets the other 75 percent.
        
  • After production costs are recovered, profits will be distributed as follows:
    • MacWizards Music gets 12.5 percent for being the record label
    • The "Investor" gets 12.5 percent for putting up the cash in the first place.
    • The artist gets the other 75 percent.
• All other services are negotiable -- Marketing and advertising, initial production run, targeted distribution, studio production, etc.

There are 50,000 independent bands listed at GarageBand.com alone. Thousands more can be found at mp3.com, DMusic and Vitaminic, just to name a few. More are cropping up daily. Last year, the major labels only released (according to RIAA statements above) 7,000 new recordings. Less than half of the Indies got a release of any sort. And correct me if I'm wrong, but I think that the record industry is paying a little less than 80 percent of the profit to the artists.

Let's go back to the RIAAs stats for a moment. Potentially, they missed at least 30,000 available acts in 2001.

If only one in 10 releases is successful, we're talking about 300 killer acts. And let's call "success" unit sales of 100,000 (a tenth of what it takes to qualify for the record industry's definition of the term). At $10 a unit, that's $30 million. Take off $2 a unit for actual costs and the profit is about $24 million. I'd give up 75 percent of that (assuming MacWizards acted as the Investor for each and every product), still be very, very happy and have plenty left over to finance the other 27,300 failures. If I can only sell an average of1,000 copies of the "failures," that's still another $2.1 million profit. Take away production costs and I still make more than $250,000 on the "failures."

At the same time, I'd be putting 6 times that much into the artists' pocket.

Think outside the box? How about we just kick the box into the river, turn our back on it, let it float away and slowly disintegrate on its own?

So all aboard, Mateys! Are you tired of being forced to walk the plank because you're not the "flavor of the month"? Are you tired of giving all of your gold to the captain of the ship? Have you had enough of watching your children (the musical works to which you gave birth) be taken away for 35 years, maybe even shackled in the basement or attic because they have been declared unfit for the eyes and ears of the public?

The RIAA is looking for pirates. Let's show them what the real pirates look like. We'll give them a good look as we plunder their castle, claim the gold that is rightfully ours and free the indentured servants that they have taken hostage.

We've had enough. Independents' Day is coming.