Occasionally to understand the present, one has to revisit the past.
This article is part of a paper that I started writing in January, 2009. The contents are extracted from a chapter entitled “Format Change”.
(The paper is still incomplete, awaiting accurate sales data….. for AC/DC – and it may never be completed for that reason. Many of it’s conclusions are valid and hereunder I present one of them.)
Our economy is built on cycles which can be thought of as the innovation realisation cycle consisting of ” Concept, research, production, sales, distribution, result, (looping)”.
Over the last four decades we have seen four such loops in the music industry.
These cycles appear to occur at twelve year intervals. We call this the generational influence.
If we break this chart into its separate groupings we find:
…that each technology has a ramp up period, a peak and decline as the new technology is introduced and adopted.
The adoption is directly related to the maturity [technical capabilities of the playback device] and the lowering price point as a result of the competitive new manufacturing entrants.
Detailed analysis of Chart C above shows that apparently, it took 14 years to reach the peak for CD technology. We would proffer an alternative assumption to the premised twelve year technology curve in the instance of CD’s; if we look at 1996, there appears a plateau and then a start to the end of the technology, when it receives an unexplained boost [online music sellers - the internet?] that carries it forwards for another four years.
The overlap of the technologies indicates that consumers can tolerate up to two formats in the market carrying the same content. Obviously this means that a large part of each cycle is due to consumers replacing their existing collections with a media carried on the new format, as they become more inured to using a hardware reproduction technology. This confirms a 2001 paper by Peter  Alexander who predicated that [file] sharing emerges endogenously, largely as a byproduct of users’ attempts to reduce own-costs. Our premise on this unexpected boost is the introduction of the Internet commercially in 1995 and the ability to play music on computer devices [the CD-player] that was commercialised successfully partly as a result of the Interent and the content there-on.
Chris Gilbey, then an executive at BMG(Aust), approached me at Ausnet in March 1995 and proposed the release the world’s first interconnected music CD (featuring the music of AC/DC). The concept was that users could listen to the music on their computers whilst going online and viewing information about the band. This and other similar marketing concepts were popularised and led to a tremendous interest in media being able to be experienced online. Net radio stations appeared as early as 1997.
The music industry became concerned about the potential for online distribution of music notwithstanding the inferior quality of reproduction as a result of compression technologies that were used. The music industry viewed the Internet as a place that should be avoided at all costs unless and until there was a foolproof digital rights mechanism (DRM) that would ensure that consumers would not be able to access music online. Indeed in most countries the music industry actively lobbied governments to ensure that there was no levy or tax on digital recordable discs so as to ensure that there was not a ‘tacit legalization’ of downloads granted. In the mean time record industry associations worked to develop licensing regimens for streaming audio Internet Radio Stations that enabled the industry to receive a percentage of profits of the streaming radio operators. Because of the combined costs of data transfer on the one hand, and licensing fees on the other, together with the advertising industry being leery of entering this new field too early, most of the Internet Radio Stations folded within a short period of time.
The above CD bell curve graph shows how 12 year cycle bell curve functions. However, when we examine Digital Music Sales we note there is no gradual buildup. One day digital sales were non-existant, and next there was a hockey stick of growth.
Comparing Ipod sales makes it appear that there is a definite correlation:
but if we read http://www.theregister.co.uk/2003/11/07/your_99c_belong/ then it appears, that for Apple – this is a loss leader with the financial benefit going to the music Industry and not to Apple. So what caused an entire industry to suddenly pop out of nowhere – as a present to the music industry?
Lets examine P2P numbers for the same period.
N.B. The P2P 12 years started from 1995 with the commercialization of the Internet (NNTP file sharing) and the management of those files was enhanced by the 1997 release of Winamp.. Now lets combine Chart D with Chart F
(The relevance of the date in the chart is that that the apple iTunes store in France, Germany and the United Kingdom was opened on the 15-Jun-04.)
Here we see a correlation between the fall and rise of a format that grows at an unprecedented speed. The dip in P2P Music file sharing correlates almost exactly with the industry introducing digital copies of the music. The logical conclusion is that the spread of music digitally, and free, acted as a supercharged promotions mechanism. The P2P file sharing community empowered the growth of micro media markets. Because there was no formal reporting of airplay in the way that radio stations reported and published play lists, record companies were not able to see the value that P2P was playing in promoting new music. Instead the music industry tried (and continues to try) to shut down P2P activity. However it is the growth of self establishing, and self regulating crowds, that are fan based, that have enabled the music industry to keep growing notwithstanding the slow down in CD sales and other physical formats. We now have a chart that for the first time shows the actual file sharing quantum potential.
However if the hypothesis of a 12 year platform cycle (as identified above) is in fact true, the CD was in any event, due to be retired in favour of the next platform technology.
Non partisan Economists (persons not paid to prepare a report or academics that do not receive the majority of their funding from industry lobby groups) would argue that this wasn’t damaging to the industry but the natural process of the format change cycle as is evidenced in comparing the recurring dips in the next chart
The last topic in format change is the removal of DRM from Digital downloads. DRM which was widely used by the industry in all initial digital releases has now almost totally disappeared. The non DRM catalogue is now over eleven million digital tracks. The results in consumer take-up have been astonishingand confirm that the users want to download non-protected music in a non complicated manner for use on their devices of choice (which was what file-sharing was all about).
Digital may well be the last format change we see for a while. Consumers are taking to legitimate digital downloads in numbers that make the previous history of the industry look irrelevant.
Yet, the industry bodies still claim that file-sharing damaged their sales and was not the early adoption of technology that they themselves failed to adopt at the appropriate time. The appropriate time according to previous format changes would have been 1997-1999. Had they allowed non-DRM encoded digital downloads from 1997, I doubt that file-sharing would have become as popular or a generational meme.
Sources for the data in the graphs was drawn from, Big Champagne P2P Statistics, Koltai P2P Statistics, Apple Annual Reports, RIAA Shipments data, BPI Sales releases, IFPI Statistical announcements in the Worldsales series, IFPI RIN series and the IFPI DMR series.
 Peer-to-Peer File Sharing Communities – Brendan M. Cunningham, Peter J. Alexander, and Nodir Adilov – October 15, 2001 – http://www.peterjalexander.com/images/p2paer.pdf
This document was prepared by Tom Koltai on a voluntary non-partisan basis and received no funding from any person.