Economics of Music Streaming

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A Claim for Streaming

When speaking economically, the digital music sector of the international music industry is undoubtably the most important sector in the industry. Within the last decade, music has seen cardinal changes in the way both major and independent labels distribute their products. An industry that once relied on Payola's and mass distribution of physical records and CD's now relies heavily on the power of the internet. The first instance of mass distribution of music through the internet was by the service Ritmoteca.com in 1998 [1]. Ritmoteca had a library of over 300,000 songs, offering individual songs for 99 cents each and albums for $9.99. After signing distribution deals with many major music labels such as Warner Bros, Sony, and Universal, it was clear that the market for selling music online was opening up. The year following Ritmoteca's inception, the peer-to-peer file sharing service named Napster opened its virtual doors to listeners across the world at the price of nothing [2]. At its peak, Napster had over 80 million users across the globe [3]. The service's popularity sparked a great deal of controversy, as the artists whose music was being downloaded for free felt they deserved to be compensated. Naturally, dozens of lawsuits followed, resulting in Napster's peer-to-peer file sharing system to be shut down. However, Napster was able to make somewhat of a comeback by competing in today's ever popular music streaming industry, which allows for users to listen to music at a monthly fee or for free, all the while compensating artists. However, artists still feel they are being compensated at too low of a rate. Clearly, there is still friction in the industry between the consumers and producers.

So the question remains, what are record executives doing to fix the problem with the products they are putting out? Before diving into this question and finding some resolve, there are two important changes in the industry that must be identified.

First, and most importantly, the incentives of the consumers have changed. The industry has made fundamentally drastic changes because of services like Napster, and many other torrent sharing websites. There are still a large number of people who prefer to buy music, as shown by Apple's iTunes music store recently reaching a grand total of 25 billion downloads to date [4]. However, there is a large and significant group who prefer to download music for free because they simply cannot afford to fuel their passion for the art by paying for it. And because legislation regarding copyright infringement and digital piracy has changed people's decision whether to pirate or buy music marginally at best, individuals are driven to continue downloading music for free. Put simply, a large group of individuals' incentives drive them to download music for free.

Second, the supply and demand models in the industry have changed. Before music could be formatted digitally, there was theoretically a finite number of times one could purchase a physical copy of a single or album. This drove up the price of the product. There was also a finite number of times that consumers would purchase any given product, which could be predicted by the respective labels. Individuals rushed to the nearest record store to buy the new album from their favorite artist quickly before the next die-hard did. Because of this, one could expect to pay up to twenty dollars for an album. This is far from the case today. Despite storage capacity, there is theoretically no limit to how many times one can download a song. There is not a finite supply. Thus, the price of the product has gone down. One can now expect to pay between ten and twelve dollars for an album.

Clearly, record labels are at odds with their consumers, and the market for purchased music is playing against them. The price of the product has gone down while individuals are obtaining the products for free at all time highs. The question...
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