It's known for regular readers that I don't believe that illegal file-sharing has an noteworthy impact in the rise or fall of music market profits: it's more an excuse than anything else. This article tries to find out what's causing this fall.
Even if I read some stuff about market dynamics over the years, I'm surely no expert on the matter. Also, this all issue is way to chaotic to find simple and obvious causes for this fall. So, I decided instead to point four points that surely have some major impact on music market. This doesn't mean that these are the most important issues - they probably aren't, but at least they are some real measurable causes.
The digital era
The music market never made an effort to understand the digital era. The most flagrant example of this is the well-worn Napster case. Yes, people were doing downloads of copyright material, and yes, the copyright owners weren't getting nothing from it. That's beyond the point. The point is that the music industry instead of trying to understand what was happening, decided to just sue them and shut it down. With that act, they also gave a statement: they don't care about the digital era, if it hurts them they'll fight to take it down. The problem here is that you can't take down the digital era, because that's no company, no infrastructure nor even a technology: the digital era is a mind set. People share files because they feel there's no wrong with it. Some people download digital music for free arguing that the real cost of a digital file is zero. It's this kind of social mind set that makes the digital era define the music market's future, and if the music industry keeps against it, or at least doesn't bother trying to comprehend it, then they're fighting against the future of the market they are, thus fighting themselves. Of course that some people got it, and used the digital era to make profit: Apple, for instance, created the iPod and iTunes, making huge profits in an empty market. But the profits are not only for retailers: I've seen musicians, labels and every other piece of chain in the music business benefit from the digital era, they just decided to understand it first. The best Portuguese music I got in 2007 came from a Portuguese label created this year, some other music labels I know are in frank expansion, some music stores too. We've seen new business models rising, from fans-funded recordings like what you can find on SellABand, or even bands making money by giving their music for free in sites like ReverbNation.
The purchasing power
There are also less music related issues that have an huge impact in the music business, and ignoring them is like forcing ourselves not to see the elephant in the room. One of them is the actual purchasing power for these kinds of goods in the so-called developed countries. I've done several parallels in the past: for instance in the 2006 Portuguese BarCamp I compared the music business with the coffee machines business. The fact is that businesses - each one of them - have to adapt to the overall market. If people start to consider some stuff as "luxury items", then maybe those items should be sold as such. If
people start thinking that some item is more valuable than other item - in a case where typically they'll choose upon one of the two - then the second one has naturally to be less expensive than the first one. Market laws apply to any market, but the music industry fails to understand that the music market follows the same rules than any other market.
The physical price
So, the digital era appeared and with it digital music, that feels like free. On the other hand, the purchasing power for the class of goods music is inserted in is being reduced in the last few years. The natural thing to have would be the price of CD's, more than any other physical format for music sales, to follow these two indicators and have their price falling. Plus, even if that wasn't case, people were already expecting the CD price to fall anyway: one of the things that were being said in the first times of the Compact Disc is that the high price they cost would soon fall with new technology arriving, and the consumers kept that in mind. The manufacturing cost sure fell, as we managed to see, for instance, in the price of blank CD-R's. Yet, the price of a music CD kept rising. Doing the math, what's expect to happen to music sales other then a fall?
How to measure quality?
One of the causes, at least in Europe and in the United States for the rise of the physical price is the way big retailers entered in the music market. Big stores had everything in one place, wanting to be your one-stop-choice. They managed (by quantity and scale) to practice such lower prices that they practically killed an huge amount of small music stores, or forced them to practice even bigger prices to deal with the dropping unit sales. When they were already controlling some markets like the music market, they were then free to practice the prices of their choice. Speaking of choice...
It would be stupid trying to measure music quality. But we measure related factors, like choice and diversity. Let me explain: if music quality is hard to define because each person have different musical tastes, then it's pretty obvious that if you have few choice and diversity, then few people would be interested in the music being released and available to the public, and fewer articles for their tastes. To aggravate this, if market diversity isn't accomplished than if you satisfy someone's tastes, that person only has the choice to buy way-too-similar music (which will lead him to buy less music) or not to buy it at all.
With the fall of investment on music from the music industry, and with the fact that the market reaches its physical public mainly via big retailers, came the standardisation of music. Only a few pre-determined music styles, known to be well consumed, have place in the market. The long tail of music was being completely ignored (and majorly found their place on a less controlled environment like the Internet, embracing the digital era).
I risk to assume that if we consider the overall quality of the music available on music stores dependent of their diversity, by attracting each listener segment, then the overall quality of music has decreased in the last few years, which can then be related with the decrease of music sales.
If you still want to say that file-sharing is guilty of the decrease of music sales and overall profit on the music market, go ahead, I won't stop you, even if I don't buy it. But considering all the other factors that might affect its market, including those that surely are, please avoid making the same mistakes as Liebowitz is going to state in his upcoming paper, where he not only states that piracy is guilty of the decreasing of music sales, but that "file-sharing* appears to have caused the entire decline in the record sales and appears to have vitiated what otherwise would have been growth in the industry".
* - funilly, he measures "file-sharing" by measuring Internet penetration