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Thursday, February 13, 2003
 Big Music's broken record...
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Message Text: It's the busy season for number-crunchers at the Recording Industry Association of America [RIAA]. By the end of February, the industry trade association will release new statistics on what it says is a dizzying two-year decline in CD sales. The latest figures, from the first six months of 2002, show a 7.2% slide in CD sales from 397 million to 369 million. Revenues fell 5.1%, to $5.2 billion. Full-year sales for 2002 are said to be just as dismal -- if not worse.

Piracy is the drumbeat pulsing beneath the music industry's blues, the RIAA says. After all, CD sales defied gravity and rose during the last three recessions. It wasn't until Napster and other Internet file-sharing services such as KaZaA took off that sales began to dip. Says an RIAA spokesman: "In our view, piracy is the primary reason for the decline in sales."

Not everyone agrees. In fact, some even hold the view that the RIAA is presenting a misleading view of CD sales trends to bolster its ongoing war against copyrighted-music pirates. And the RIAA's numbers have been convincing to more than a few policymakers in the U.S. and Canada, leading to what many consider draconian and unfair proposals, regulations, and taxes for people who burn music onto CDs.

LESS STICKY STUFF. Now, George Ziemann is striking back. Ziemann, a musician and the owner of MacWizards Music, a Tempe [Ariz.] music production company, posted an article, "RIAA Statistics Don't Add Up To Piracy", on his Web site on Dec. 11. In it, he claims that one reason sales might be down is that the industry released 27,000 new titles in 2001, according to a speech made by an RIAA official, a 25% drop from the high of 38,900 in 1999.

The RIAA disputes Ziemann's analysis, saying it hasn't released an official tally of annual new releases since 1999. Industry-research firm Nielsen SoundScan has run the numbers, however, and the RIAA doesn't dispute its findings. According to SoundScan, new releases in 2001 totaled around 31,734, still a 20.3% drop.

Releases rose to 33,443 in 2002, but that's still 14% below the 1999 record. "The music industry's [modus operandi] is to throw things against the wall and see what sticks," says Nathan Brackett, senior editor at Rolling Stone. "If they're throwing 20% less stuff out there, there's less chance something will stick."

PUMP UP THE VOLUME. Ziemann's case is bolstered when you factor in CD price increases. From 1999 to 2001, the average price of a CD rose 7.2%, from $13.04 to $14.19, at a time when consumer inflation was virtually flat. What has really happened is that the record industry has drastically reduced inventory and raised prices. The result: Sales have slipped a few percentage points. Not all that bad in a beaten-down economy.

The music industry's decline also coincides with the rise of new, compelling forms of entertainment, including DVDs, video games, and, of course, the Internet. Suddenly, the music industry has stiff competition for Americans' entertainment dollar.

At the end of 2002, 35% of U.S. homes had a DVD player, up from zero just three years ago. And DVDs seem cheap by comparison: The soundtrack to the film High Fidelity has a list price of $18.98. You could get the whole movie for $19.99. According to Nielsen VideoScan figures published in the DVDinsider newsletter, DVD sales for the week ending Jan. 26 were 4.4 million, up 1 million, or 23%, over last year. Sales over the last 12 months totaled 22.1 million, up 6.4 million, or 29%, over the previous year.

BETWEEN FADS. Finally, there's the question of whether the industry reflects popular taste. At the height of the economic bubble, the labels made millions off the bubblegum music craze. In 2000, pop queen Brittany Spears alone sold 7.89 million albums. And that earned her the No. 3 spot on the charts, after rapper Eminem, and her then-boyfriend Justin Timberlake's group, 'NSync, which sold 9.93 million albums. In 2002, Michael Jackson's Invincible "bombed," selling only 2 million copies. "The industry hasn't yet found anything new to catch the public's imagination," says Rolling Stone's Brackett.

And consider what drove Ziemann to do all this research on the industry's figures. Last autumn, he tried to sell his band's new CD through Yahoo! (NasdaqNM:YHOO - News) and Amazon (NasdaqNM:AMZN - News) auctions. Because the music was burned onto recordable CDs [CD-Rs], however, he was turned away.

Yahoo and Amazon refuse to let users hawk CD-Rs at their auction sites. Yahoo says it's part of an effort to work with the RIAA to prevent piracy. eBay, the Web's largest auctioneer, does allow the sale of CD-Rs if sellers expressly state they own the copyright to the material.

HEAVY LEVY. Sound draconian? It is. Recordable CDs can contain music from an indie band, open-source software, or uncopyrighted video clips, among many other things. "I was being punished because of my chosen medium, because I didn't want to shell out the money to press 1,000 copies of a CD before I knew that 20 would sell," Ziemann says.

Things could get worse. The Canadian Copyright Board is weighing a plan to raise a levy on every CD-R sold from 21 cents to 59 cents, as well as on the hard drives found in MP3 players, where, theoretically anyway, stolen music is stored. That's a huge tax, especially when you consider that blank CDs usually sell for less than $1.

There's more. The price of Apple's (NasdaqNM:AAPL - News) popular iPod MP3 player would increase by 33%, from $300 to $400, if the levy is imposed. A 60-gigabyte car stereo from MP3 maker Rio would face a $1,260 tax. Twenty five countries, including most of the European Union, have introduced similar plans. The U.S. already imposes levies on digital media, including digital audio tapes and recordable CDs designed especially for audio.

FAULTY ASSUMPTIONS. Internet piracy is undoubtedly affecting the music business. According to Nielsen Net Ratings, 10% of Internet users have downloaded KaZaA's file-trading software, making it the sixth most-popular media application, after Windows Media Player, which comes as part of the ubiquitous Windows operating system, and various instant messenger programs. And KaZaA users are doing more than just trading chili recipes.

Still, it seems irresponsible for music-industry officials to present these sales statistics as proof that piracy is overwhelmingly responsible for the industry's woes while conveniently ignoring the economic and technological context that puts those numbers in perspective. "The policy decisions being made today are based on the assumption that [file trading] is killing the music business. But no one is looking deeply enough at the facts," says Jim Burger, an attorney who represents the computer industry at Washington [D.C.] law firm Dow, Lohnes & Albertson.

A realistic assessment of the music business' troubles would help inform policymakers as they fashion proposals aimed at eliminating the illegal reproduction of copyrighted music. No one is arguing that piracy should be allowed. But it's reasonable to expect that laws and rules designed to curb the practice be based on credible and truthful representations of the impact file-sharing is having on the music industry.
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