RIAA's Statistics Don't Add Up to Piracy


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Important Note (April 3, 2003) -- If you came to this page because you are concerned about the future of music, we have provided a Public Service Announcement which is far more important that this trivial side discussion.

By George Ziemann
December 11, 2002

The RIAA (Recording Industry Association of America) has a real funny way of looking at things. Not funny - "ha ha", Funny - "odd."

Before you read the rest of this story, I heartily encourage the reader to click on the RIAA link above. Make your own judgement before you hear a thing I have to say. Take your time. Be sure to look at their Market Data because I'm going to be quoting it.


The sky is falling! The music industry is doomed! Woe is everyone. The pirates have stolen all the gold. What will we ever do? How can we possibly recover? You've poured water on us and we're melting!

Let's quote a few of the RIAA's statements. The first quote comes from the report on 2001 year-end shipments. The title -- "Recent study Illustrates Internet Piracy's Impact on Music Market"

WASHINGTON-The Recording Industry Association of America (RIAA) announced today that the number of units shipped domestically from record companies to retail outlets and special markets (music clubs and mail order) fell 10.3 percent in 2001.

Specifically, total U.S. shipments dropped from 1.08 billion units shipped in 2000 to 968.58 million in 2001-a 10.3 percent decrease. The dollar value of all music product shipments decreased from $14.3 billion in 2000 to $13.7 billion in 2001-a 4.1 percent decrease, according to figures released today by the RIAA.

"This past year was a difficult year in the recording industry, and there is no simple explanation for the decrease in sales. The economy was slow and 9/11 interrupted the fourth quarter plans, but, a large factor contributing to the decrease in overall shipments last year is online piracy and CD-burning," said Hilary Rosen, President and CEO of the RIAA. "When 23 percent of surveyed music consumers say they are not buying more music because they are downloading or copying their music for free, we cannot ignore the impact on the marketplace."

Time out. Total number of units fell 10.3 percent. Total sales dropped 4.1 percent. Sorry, Hilary, there is a simple explanation -- The economy sucks, you guys raised prices anyway while promising to copy-protect everything and make it harder to listen to. The consumer took a step back.

And here is another contributing factor, from their article, "The Value of a CD". Last time I looked, this was the top story on the RIAA home page.

Of course, the most important component of a CD is the artist's effort in developing that music. Artists spend a large portion of their creative energy on writing song lyrics and composing music or working with producers and A&R executives to find great songs from great writers. This task can take weeks, months, or even years. The creative ability of these artists to produce the music we love, combined with the time and energy they spend throughout that process is in itself priceless. But while the creative process is priceless, it must be compensated. Artists receive royalties on each recording, which vary according to their contract, and the songwriter gets royalties too. In addition, the label incurs additional costs in finding and signing new artists.

Once an artist or group has songs composed, they must then go into the studio and begin recording. The costs of recording this work, including recording studio fees, studio musicians, sound engineers, producers and others, all must be recovered by the cost of the CD.

While this is true, all of those costs will be fully recovered from the record company out of the big 8 cents per song the artist gets paid But that's another argument for another day. Here's the interesting part.

Another factor commonly overlooked in assessing CD prices is to assume that all CDs are equally profitable. In fact, the vast majority is never profitable. Each year, of the approximately 27,000 new releases that hit the market, the major labels release about 7,000 new CD titles and after production, recording, promotion and distribution costs, most never sell enough to recover these costs, let alone make a profit. In the end, less than 10% are profitable, and in effect, it's these recordings that finance all the rest.

I was very happy to see them provide this information, because after compiling the RIAA's market data, I had noticed that the "new releases" data which had been present in all of the information from 1992 to 1999 had somehow been overlooked when the RIAA put together the 2000 and 2001 summaries.

. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Total Dollars (millions) 9024 10046.6 12068 12320.3 12533.8 12236.8 13723.4 14651 14404 13700
New Releases 18400 20300 36600 30200 30200 33700 33100 38900 27000 27000
Dollars per release (Note) 490,434.78 494,906.40 329,726.78 407,956.96 415,026.49 363,109.79 414,604.23 376,632.39 533,481.48 507,407.41

PDF file with data recalculated to 1992 dollars -- Prepared by Dimitri della Faille, Université du Québec à Montréal

So the record industry cut their inventory (and artist investment) by 25 percent and sales only dropped 4.1 percent, even though the economy is at rock bottom. There were almost 12,000 fewer new releases for the consumer to choose from in 2001 than 1999. The record companies are making more money per release than ever.

According to recent surveys among a total of 2,225 music consumers between the ages of 12 and 54, commissioned by the RIAA and conducted by Peter Hart Research Associates, 23 percent of those music consumers surveyed said that they did not buy more music in 2001 because they downloaded or copied most of their music for free.

Some have questioned whether downloading results in sales displacement. In addition to the actual claims of the consumers about their own buying patterns, there has also been explosive growth in the copying of that downloaded music onto a burned CD or a portable mp3 player. In the 2001 survey, over 50 percent of those music fans that have downloaded music for free have made copies of it. Just two years ago, only 13 percent copied it onto a portable device or a CD burner.

Up until two years ago, modems were too slow to download music. Duh. Did anyone ask these consumers if they were downloading major releases or freely uploaded Independent music? If it was the latter, that's exactly what we want the consumer to do. If piracy is the problem, why is it that sales didn't start declining until AFTER the RIAA had Napster shut down?

Let's see how the "sales displacement" theory holds up under scrutiny, using the RIAA's own statistics. All of these figures came from the RIAA's web pages, with the exception of Average Unit Price, which was calculated based on figures given. Some of the 2001 data was not included on the site either and had to be extrapolated from what information was provided.

Year End Statistics -- Net after returns -- All data in millions except Avg. Unit Price
  1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
CD Units 286.5 333.3 407.5 495.4 662.1 722.9 778.9 753.1 847 938.9 942.5 906.6
CD Dollars 3451.6 4337.7 5326.5 6511.4 8464.5 9377.4 9934.7 9915.1 11416 12816.3 13214.5 12900
Avg Unit Price 12.05 13.01 13.07 13.14 12.78 12.97 12.75 13.17 13.48 13.65 14.02 14.23
 
Cassette Units 442.2 360.1 366.4 339.5 345.4 272.6 225.3 172.6 158.5 123.6 76 45.6
Cassette Dollars 3472.4 3019.6 3116.3 2915.8 2976.4 2303.6 1905.3 1522.7 1419.9 1061.6 626 363
Avg Unit Price 7.85 8.39 8.51 8.59 8.62 8.45 8.46 8.82 8.96 8.59 8.24 7.96
 
Vinyl LP/EP Units 11.7 4.8 2.3 1.2 1.9 2.2 2.9 2.7 3.4 2.9 2.2 2.3
Vinyl LP/EP Dollars 86.5 29.4 13.5 10.6 17.8 25.1 36.8 33.3 34 31.8 27.7 27.4
Avg Unit Price 7.39 6.125 5.869 8.83 9.368 11.4090 12.689 12.333 10 10.965 12.590 11.913
 
Music Video Units 9.2 6.1 7.6 11 11.2 12.6 16.9 18.6 27.2 19.8 18.2 18.2
Music Video Dollars 172.3 118.1 157.4 213.3 231.1 220.3 236.1 323.9 508 376.7 281.9 281.9
Avg Unit Price 18.728 19.36 20.71 19.39 20.63392 17.4841 13.970 17.4139 18.6764 19.025 15.489 15.489
 
DVD Units                 0.5 2.5 3.3 7.9
DVD Dollars                 12.2 66.3 80.3 190
Avg Unit Price                 24.4 26.52 24.33 24.05
 
Total Dollars 7182.8 7504.8 8613.7 9651.1 11689.8 11926.4 12112.9 11795 13402.3 14312.92 14174.43 13596.35

Okay, sales are down 6 percent over the past two years. Considering the economy, that doesn't seem like such a serious problem. I'd also say that pushing the average price (these figures are net after returns) over $14 a unit probably didn't help any, either.

If the record industry had gone forward with the 12,000 releases that it cut back over the past two years and only sold 3,000 copies of each title (a loser in record company terms), both the units shipped and total sales would have continued to climb as they had in previous years.

Here are Hilary Rosen's concluding remarks on the state of affairs at the end of 2001.

"Global piracy on the physical side costs the recording industry over $4 billion* a year. That doesn't even include losses on-line. While the physical piracy problem is not new, our markets continued to expand. Now that consumer purchasing is threatened as well, the impact of all piracy is greater." concluded Rosen.

The source of the $4 billion figure is attributed to "IFPI, the international association representing the recording industry worldwide." Good thing she passed that one off on someone else. I just don't see where the justification for that figure could possibly come from. The numbers are simply not there. In short, this is total bullshit.

But wait. Something is missing from the 2001 statistics, at least the ones I could find. Singles. For some reason they stopped reporting this information. The reason is obvious. The single is dead. This is what the record companies are screaming "pirate" about. This is the product that the Internet has killed. And yet, this comes nowhere near the fictitious $4 billion in "lost sales" mentioned above.

Disproving the theory that "You'll never go broke underestimating the taste of the American public" (H.L. Mencken -- thanks to the slashdot crowd for pointing out my error), U.S. buyers have apparently come to the realization that $3.50 to $5.50 is too damn much to pay for one song.

Year End Statistics -- Net after returns -- All data in millions except Avg. Unit Price
  1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
CD Single Units 1.1 5.7 7.3 7.8 9.3 21.5 43.2 66.7 56 55.9 34.2
CD Single Dollars 6 35.1 45.1 45.8 56.1 110.9 184.1 272.7 213.2 222.4 142.7
Avg Unit Price 5.45 6.16 6.18 5.87 6.03 5.16 4.26 4.09 3.81 3.98 4.17
 
Cass Single Units 87.4 69 84.6 85.6 81.1 70.7 59.9 42.2 26.4 14.2 1.3
Cass Single Dollars 257.9 230.4 298.8 298.5 274.9 236.3 189.3 133.5 94.4 48 4.6
Avg Unit Price 2.95 3.34 3.53 3.49 3.39 3.35 3.16 3.16 3.58 3.38 3.54
 
Vinyl Single Units 27.6 22 19.8 15.1 11.7 10.2 10.1 7.5 5.4 5.3 4.8
Vinyl Single Dollars 94.4 63.9 66.4 51.2 47.2 46.7 47.5 35.6 25.7 27.9 26.3
Avg Unit Price 3.42 2.90 3.35 3.39 4.03 4.58 4.708 4.75 4.76 5.26 5.48
 
Total Dollars 358.3 329.4 410.3 395.5 378.2 393.9 420.9 441.8 333.3 298.3 173.6

You'll note that, even with the 1992, 1996 or 1997 figures, it would take 10 years for this to add up to the $4 billion in "piracy losses" that someone is pulling out of the air (or a somewhat lower area from which things like this are known to emerge). Hilary Rosen is going to have an even tougher time trying to explain what's going to happen next without making the tale of pirates sound even more like the fictional account than it is.

Before I continue, however, if anyone spots an error in the charts above, let me know and I'll correct them. As I said, some data was extrapolated. If you've got a real number, let's hear it (and the source). Not that's it going to matter much. The record companies are going to realize that the pirates are not the consumers that downloaded a few mp3s. The real pirates are coming and they're going to do more than steal a few songs from you.

We're going to tear down your castle walls.

Revision

Originally, at this point in the story, I outlined a deal that I was offering to those artists who performed at a specific event. This event has since been cancelled, so those details are now irrelevant and I have to rewrite the ending. The basic idea is that -- if the artists must bear all the cost of producing, distributing and payola and the record label is merely giving the artist a loan which must be repaid -- the tables should be turned. The artist should get the majority of the profit and have some say in how their money is being spent.

There are 50,000 independent bands listed at GarageBand.com alone. Thousands more can be found at mp3.com (but far less than a month ago), DMusic (just had to add new servers because their artist base is growing so fast) and Vitaminic, just to name a few. More are cropping up daily. Last year, the major labels only released (according to RIAA statements above) 7,000 new recordings. Less than half of the Indies got a release of any sort. And correct me if I'm wrong, but I think that the record industry is paying a little less than 80 percent of the profit to the artists.

Let's go back to the RIAAs stats for a moment. Potentially, they missed at least 30,000 available acts in 2001.

If only one in 10 releases is successful, we're talking about 300 killer acts (assuming only 10% of the successful acts qualify as "killer" acts). And let's call "success" unit sales of 100,000 (a tenth of what it takes to qualify for the record industry's definition of the term). At $10 a unit, that's $30 million. Take off $2 a unit for actual costs and the profit is about $24 million. I'd give up 75 percent of that, still be very, very happy and have plenty left over to finance the other 27,300 failures. If I can only sell an average of1,000 copies of the "failures," that's still another $2.1 million profit. Take away production costs and I still make more than $250,000 on the "failures."

Clarification -- In response to numerous letters pointing out that if there are 300 "killer" acts, this would actually add up to $350 million, not $30 million. You're right. But nine out of 10 of the killer acts either didn't have enough material, got in a fight during the recording process and broke up, got an advance and developed, uh, let's just say "bad habits' or otherwise ruined their careers on their own. I'm thinking only 10 percent of the killer acts are going to pan out in the long run. You can raise that number if you like.

Radio missed even more music, only playing a small fraction of the abysmally small number of music that actually managed to get released. According to Clear Channel owner Art Mays, at a recent Senate Commerce Committe hearing (Jan 30, 2003), Clear Channel -- representing more than 1,200 radio stations across the country -- added only 3000 songs to their playlists last year, which represented the work of only 550 artists.

The RIAA is looking for pirates. They need to look in the mirror. The biggest threat to the recording industry is that they long ago dismissed as insignificant the two elements without which there would be no recording industry -- the music and the artists.


Note Concerning Table 1

Your first table uses Total Dollars and # of New Releases to obtain a Dollars per Release. The problem is that Total Dollars is the income from ALL releases not just new ones according to the first RIAA quote in your article. While older releases will have a diminishing effect on income, I do not believe they can be discounted completely. As evidence, check the RIAA's statistics for multi-platinum certifications. Clearly millions of old releases must have been sold in the past year to account for these certifications. Now the math to account for old releases is much more complicated and I'm not sure how easy it would be to obtain the data needed to properly analyze the relation. The only thing I can say for certain is that new releases will make less than you calculated.

Andrew Kreps, Darien, IL

Reader Response

Due to the overwhelming response this article has generated, reader response has been listed separately in three categories.

Follow-Ups

RIAA Disputes Own Information
Radio Responsible for CD Decline
2002 Sales Data Raises More Questions
RIAA Exposes Piracy Myth

McCartney Leads Record Touring Year
Jim Bessman, 19 December 2002

Sir Paul McCartney was the top touring artist in the world for 2002, with a global take totaling $126.1 million ($98.8 million in North America). The Rolling Stones, who are still out, are said to have taken in $90 million for the year, which Cher's "Farewell" tour coming in third at $67.6 million. Other top tourists were Billy Joel and Elton John, Dave Matthews Band (they played before the biggest total audience--1.4 million fans), Neil Diamond, Britney Spears, Creed, Aerosmith, the Eagles, Crosby, Stills, Nash & Young, and 'N Sync. Total U.S. gross touring dollars for the year rose 8.6% to a record $1.7 billion, with record attendance up 6.2% to almost 42 million.

End-of-year U.S. album sales, however, seemed to be worsening, with a shortened holiday sales season due to a later Thanksgiving a likely contributing factor. Whatever, the holiday sales drop leading into Christmas was bigger than that of the rest of the year.


Historical Notes and References

May, 2000 -- The Federal Trade Commission unanimously found reason to believe that the arrangements entered into by the five largest distributors of prerecorded music violated the antitrust laws in two respects. First, when considered together, the arrangements constituted practices that facilitate horizontal collusion among the distributors, in violation of Section 5 of the Federal Trade Commission Act. Second, when viewed individually, each distributor's arrangement constitutes an unreasonable vertical restraint of trade under the rule of reason.

May 10, 2000 -- Record Companies Settle FTC Charges of Restraining Competition in CD Music Market

All Five Major Distributors Agree to Abandon Advertising Pricing Policies

The Federal Trade Commission announced today that it has reached separate settlement agreements with Universal Music and Video Distribution, Sony Corp. of America, Time-Warner Inc., EMI Music Distribution and Bertelsmann Music Group (BMG), the five largest distributors of recorded music who sell approximately 85 percent of all compact discs (CDs) purchased in the United States to end their allegedly illegal advertising policies that affected prices for CDs. The proposed agreements would settle FTC charges that all five companies illegally modified their existing cooperative advertising programs to induce retailers into charging consumers higher prices for CDs, allowing the distributors to raise their own prices. The complaints are the culmination of an extensive industry-wide investigation by the FTC of these practices. The FTC's orders would require all the companies to discontinue their "Minimum Advertised Price" (MAP) programs in their entirety for seven years. The orders contain additional provisions to preclude the companies from maintaining the anticompetitive status quo.

"The FTC estimates that U.S. consumers may have paid as much as $480 million more than they should have for CDs and other music because of these policies over the last three years. These settlements will eliminate these policies and should help restore much-needed competition to the retail music market, consisting of $15 billion in annual sales. Today's news should be sweet music to the ears of all CD purchasers," said Chairman Robert Pitofsky.


Despite this noble effort by the government, the average price of a CD has continued to rise. Thanks to Mick Right for digging this one up. -- GZ

©2002 George Ziemann
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