At the Download Crossroads

What music lovers have suspected for months, and record labels vehemently deny, has apparently been confirmed by Forrester Research: Piracy is not responsible for the 15% drop in music sales in the past two years. According to a new report from Forrester, "Labels can restore industry growth by making it easier for people to find, copy, and pay for music on their own terms."

Forrester's Josh Bernoff explains, "There is no denying that times are tough for the music business, but not because of downloading. Based on surveys of 1000 online consumers, we see no evidence of decreased CD buying among frequent digital music consumers. Plenty of other causes are viable, including the economic recession and competition from surging video game and DVD sales. But labels will soon discover that there are several simple ways of satisfying today's sophisticated digital music consumers.

"First, consumers will demand their right to find music from any label, not just two or three. Second, they want the right to control their music by burning it onto CDs or copying it onto an MP3 player. Finally, consumers will demand the right to pay by the song or album, not just via the subscription services now offered by pressplay, MusicNet, FullAudio, and EMusic. We call this set of features—which any paid music service must meet to satisfy customers—the Music Bill Of Rights."

The researchers say that, in the next two years, labels "will struggle to deliver on the promise of digital music," but their services will fall short because they fail to match the Music Bill of Rights. Forrester predicts that by 2005, labels "will endorse a standard download contract that supports burning and a greater range of devices. Downloading will start to soar in 2005 as finding content becomes effortless and impulse buys [get easier]. Labels will make content available on equal terms to all distributors, while online retailers become hubs for downloading."

By 2007, Forrester is predicting, the new business model will generate $2.1 billion, or 17% of the labels' revenues. "Big hits will spark traffic, as people download music directly to their cell phones, portable players, or PCs . . .. As a result of the growth potential, artists will embrace the Internet and sign downloading rights over to their labels, or see sales suffer."

In addition to Forrester's study, the Yankee Group also released its findings last week predicting that unlicensed music downloads will peak in 2005. "Consumers will continue to flock to unlicensed file-sharing services such KaZaa, Morpheus, and LimeWire because of their unlimited content and zero cost," says Yankee, adding, "Consumers aged 14 and older downloaded 5.16 billion audio files in the US via unlicensed file-sharing services in 2001. This figure will grow to 7.44 billion audio files downloaded in 2005 before declining to 3.9 billion in 2007 due to the impact of legitimate music services."

Yankee's Michael Goodman says, "Efforts by the record labels to use the courts to quash music piracy have failed, and legitimate online music services have had little impact. The future of music, however, resides on the Internet, with its dramatically lower distribution costs."

The report, Digital Audio: Legitimate Services Inch Forward, suggests that to be successful, legitimate music services must meet the following criteria:
Availability: Music services must offer content from all five major labels as well as the majority of independent labels.
Ownership: Consumers do not want to rent music. If they pay for it, they want to be able to mix it, burn it, copy it, and retain ownership even if they choose to discontinue subscribing to a service.
Portability: Downloaded files must be playable on different devices in the home, at work, and when mobile.
Exclusivity: Legitimate music services must differentiate themselves from unlicensed services with unique content and services.
Digital Rights Management (DRM): Consumers want to share music, and they will find a way to do so, thereby defeating all realistic DRM capabilities.

Goodman adds, "In the end, the record labels will have to share control of the content with the consumer. This philosophical shift will not come quickly or easily to the record labels. Nor will consumers quickly adopt fee-based file-sharing services."