Longing for the day ...

You can't lose sales you would never have had - Mouthzoff column

In 1999 global record sales peaked at $38billion. That same year Sean Fanning, John Fanning, and Sean Parker launched a simple peer-to-peer exchange system called Napster. Not until 2012 did overall global recorded music sales begin to grow again - up 0.3% on a low of $16.45billion in 2011. The International Federation of the Phonographic Industry and many others have consistently blamed illegal downloading of MP3 files for this decline.

Since the decline was first noticed, many studies have been conducted into the actual effect of 'piracy' or 'illegal downloading' (they are NOT the same thing) but no definitive relationship has been found. This is mostly because of a lack of agreement among researchers about what is the best information and how it should be analysed. In recent years, however, researchers have agreed that two basic effects result from the free exchange of digital music files.

First is the 'substitution effect', which is blamed for the decline in music sales. This is what happens when a music fan downloads an MP3 (legally or not) or digital album instead of buying it. It seems common sense to think that each download is one that should have been bought, and that if every illegal download had been paid for the recorded music sector would have continued growing. But it's not that simple - many downloads are simply people grabbing a copy of something that they would not have paid for if they had been made to. While it's generally agreed that the substitution effect and illegal file-swapping have reduced sales, the numbers don't quite add up.

That's because of the 'discovery effect', in which people try before they buy. Or rather, they buy after trying and liking. Again, it's common sense that if people hear a song they like on the radio or via a friend's Facebook feed, they may like it enough to go by a copy. This is why record labels have been giving their music to radio stations - and in some cases paying them to play it - for years. It's what listening booths in records were all about and it's the same thing as food manufacturers giving people samples in supermarkets. But if this was the only effect of free file-swapping, the record industry would also have kept growing.

A reconciliation of these effects began with a study by Harvard economist David Blackburn in 2005. Blackburn looked at a range of studies by other people and concluded, quite sensibly, that the results of file exchange depend greatly on the musicians' status. If you are a well established act like Lady Gaga, who spends a fortune on promoting a new album, then there is little to be gained from the discovery effect and the substitution effect reduces overall sales. But if you're an unknown Indie act for whom sales are already quite low, then there's nothing to substitute and the discovery effect dominates - sales go up when music is shared among fans.

In March, a new European study showed that, on average, the discovery effect dominates slightly. If 10% more people click on an illegal download, there will be a 0.2% increase on the corresponding legal download. Even better, that's a 0.3% increase when the 10% is on a streaming site.

The lesson? If you're an undiscovered act, it's a good idea to give your music files away and make them available via streaming sites, while having them available for sale as well. That way, the discovery effect will help build you a fan base like the one Amanda Palmer used to raise $1.2million for her album and tour - but that's a topic for a future column.

Amanda Palmer - she's a goddess of mew music business models. Music Box Theater, Hollywood, CA; 16 December 2008 (Photo credit: Wikipedia)