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Music Industry-Related Issues in Economics Report

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Updated: Aug 16th, 2021


For several years, “sex” was the number one search term on the internet but when “mp3” started gaining momentum, it did not stop until it became the most frequently searched word on internet search engines. Mp3 has since been then cited as a perfect example of how the internet can not just change, but revolutionize an industry. Likewise, mp3 files give music consumers a new level of access to hundreds and thousands of songs and previously unheard of artists (Cirulis et al, 2007).

Its twin downside: piracy. The piracy issues stems directly from the ease of distribution online. Cirulis et al (2007) proposed that one of the ways mp3s are being deployed is to get around the traditional distribution channels that the industry controls–either by bands that want to reach their fans directly, or by pirates who want to become distributors themselves.

Illegally downloading files has become very common, and as much as other intellectual property rights issues, provided controversy about whether infringement of copyrighted music has either hurt or helped CD sales.

While studies found that file sharing has a negative impact on record sales (Liebowitz, and Waldfogel, 2006), other studies concluded that file sharing has no negative effect on CD sales (Olberholzer-Gee and Strumpf, 2007) after analyzes of actual downloads on file sharing networks as file-swapping translated into more album sales that was statistically indistinguishable from zero. The study showed these downloads of 500 random albums of varying genres improved album sales of the top albums in stores at the time.

Turn of events however, indicate that CD sales have dropped 20% since last year, said to be the latest sign of the shift in the way people acquire their music. The music industry, and other types traditional of media such as film and TV may have a difficult time adapting to the digital age but BigChampagne LCC has reported that around one billion songs a month are being traded on illegal file-sharing networks. This has resulted in decline of CD sales, translating to a significant amount of record stores going out of business making it more difficult for consumers to find and purchase older titles in stores (Smith, 2007).

The Wall Street reported that, “Apple Inc.’s sale of around 100 million iPods shows that music remains a powerful force in the lives of consumers. But because of the Internet, those consumers have more ways to obtain music now than they did a decade ago, when walking into a store and buying it was the only option,” (Smith, 2007).

Some find the music industry almost powerless as it struggles together with the film, TV and publishing industries. Smith’s report (2007) also showed the music industry posting the weakest sales it has ever recorded sampling two lowest-selling No. 1 albums, tracked by Nielsen SoundScan: one week “American Idol” runner-up Chris Daughtry’s rock band sold just 65,000 copies of its chart-topping album and another week, the “Dreamgirls” movie soundtrack sold a mere 60,000. Smith (2007) also noted that in 2005, such tallies would not have been enough to crack the top 30 sellers as in prior years where a No. 1 record sells 500,000 or 600,000 copies a week.

Response: Composers, Artists and Major Music Companies

Popular songs, albums, as well as countless lesser-known works found online in legal or pirated forms had publishers hope that those will be purchased through legal services like Amazon, E-bay, or Apple’s iTunes stores. However, consumers can listen to them on MySpace or download them free from many choice sources such as MP3 blogs. As

Artist manager Jeff Rabhan said, CDs have become some sort of an advertisements for more lucrative goods like concert tickets and T-shirts. Smith (2007) quoted Rabhan claiming, “Sales are so down and so off that, as a manager, I look at a CD as part of the marketing of an artist, more than as an income stream. It’s the vehicle that drives the tour, the merchandise, building the brand, and that’s it. There’s no money.

In 2003, the Open Music Model was proposed suggesting that the only viable system for distributing music online is through a DRM-free peer-to-peer file sharing system based on a research conducted at the Massachusetts Institute of Technology (Ghosemahumber, 2002). Five necessary and sufficient fundamental requirements for a viable commercial peer-to-peer music distribution network were outlined below:

  • Open File Sharing where users are free to share files on their hard drives with each other.
  • Open File Formats providing that content must be distributed in MP3 and other formats with no DRM restrictions.
  • Open Membership that copyright holders must be able to freely register to receive payment.
  • Open Payment where users must be able to access the system using either credit cards or access cards purchasable anonymously in cash from retail stores.
  • Open Competition where multiple systems can tie into each other’s file sharing databases to discourage a monopoly through legal design.

The model pushed for a $5 per month all-you-can-download subscription fee later adapted by Yahoo! Music in 2005. The downside of the model is that it does not discourage piracy.

The Supreme Court Ruling

The U.S. Supreme Court ruled June 2005 that software companies can be held liable for copyright infringement when individuals use their technology to download songs and movies illegally and this has been considered a crucial victory in the ongoing battle to curb Internet piracy — a campaign centred on lobbying for new laws, filing thousands of lawsuits against Internet users (Crawford, 2005).

In the case called MGM v. Grokster, the high court overturned a ruling that had barred the music industry and Hollywood from suing Internet services used by consumers to swap songs and movies for free. The case centred on file-sharing, or “peer-to-peer” did not however specify if the technology was illegal, but the justices focused on the actions of the peer-to-peer software companies named in the case, Grokster Ltd. and StreamCast Networks Inc., makers of the software Morpheus, whether they propagated the illegal use of the technology. Justice David Souter, wrote, “We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties,” (qtd. by Crawford, 2005).


Digital music users keep on growing and technological access has become very difficult to legally restrict. The strategies of musicians, management and publishers have to embrace the movements in technology and consider the preference of the users. As noted earlier, the communication technology had served as much as a marketing arm or an advertisement and not so much as retailer. In marketing digital music, manufacturers have to define their targets as well as how to lure them to legally buy wares.

Composers, artists, and record companies have to focus more on lowering their profits as well as address piracy through rigorous information campaign, or use the process as a promotional and marketing tool altogether. Government policies will also help the industry in solving piracy. Laws on intellectual property rights and prosecution of violators are possible steps for the music industry together with the government.


Cirulis, M., Blanchard, T., and Upaghyay, G. (2007). “MP3 the next generation of music.” Web.

Crawford, Krysten (2005). “.”, CNN. Web.

Ghosemajumder, Shuman. Advanced Peer-Based Technology Business Models. MIT Sloan School of Management, 2002.

Oberholzer, Felix; Strumpf, Koleman (2007) “The Effect of File Sharing on Record Sales: An Empirical Analysis.” Journal of Political Economy.

Pollock, Rufus (2005). “P2P, Online File-Sharing, and the Music Industry.” Web.

Smith, Ethan (2007). “Sales of Music, Long in Decline, Plunge Sharply.” The Wall Street Journal. Web.

USA Today, (2005), Firestorm rages over lockdown on digital music. Web.

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