The Record Industry's Fear of the Future

The Record Industry's Fear of the Future

The Record Industry's Fear of the Future

Moneybox
Commentary about business and finance.
Dec. 17 1998 4:50 PM

The Record Industry's Fear of the Future

The future is coming, but the record industry doesn't want to recognize it. That may seem like an odd conclusion, when you consider that Tuesday all the industry heavyweights gathered in New York to announce the Secure Digital Music Initiative. The SDMI is a yearlong project intended to produce agreement on an open standard for distributing music over the Internet. Currently, there are three competing technologies, including one--MP3--that has become known as the tool of choice for copyright pirates.

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The SDMI's quest for a single standard is laudable. But while the record industry is trumpeting the initiative as evidence of its commitment to new technology, it actually demonstrates something else: the way the industry's obsession with curbing piracy slows the adoption of new formats and impedes the migration of consumers to those formats.

Any industry whose business depends on intellectual property obviously needs to worry about piracy and copyright violation. But the record industry worries too much. It is the proverbial boy who cried wolf. Its insistence that home taping would destroy the record market, its war against digital audio tape (because that really would destroy the record market), and its crusade against those few artists who have distributed music for free over the Internet make it difficult to take its latest jeremiad seriously. More importantly, by centering the SDMI on the issue of copyright protection, the industry is missing a chance to move strongly into the brave new world of online music distribution.

In part, the industry's stance reflects a kind of tightfistedness that one suspects has hurt it in the long run. Record companies have never been comfortable with the concept of the loss leader, nor have they ever really tried to price their products where economic theory says they should be priced: just above marginal cost. CDs are actually less expensive to make than tapes or LPs, but they cost twice as much. And while in the short run that has meant that lots of oligopoly profits have flowed into the record industry's coffers, it's also meant that record sales are never going to be as large as they should be. The lack of pricing competition in the industry has kept record companies from becoming as efficient, and from reaching as many people, as they should.

The same phenomenon can be seen in the industry's hesitancy to make a firm move into the online world. Music seems like a natural for the Internet, and one would think the industry would jump at the chance to deliver its product quickly and simply, direct to the consumer. But since record companies want to charge just as much for a downloaded album as for a CD you buy in the stores, they're tentative about the new technology. The Net has had the tendency to drive prices down and to empower consumers, neither of which the industry has any experience with. So it's more interested in fighting piracy than in actually implementing a real strategy.

Of course, there's no question that the future belongs to digital distribution. And SDMI is important insofar as it solves the problem of competing standards. But the record industry's skittishness about that future is such that foot-dragging is its only response. A year from now, when the SDMI produces consensus on a single standard (and probably on anti-piracy measures), the industry will have no more excuses for delay. Though I'm sure they'll try to come up with some.