Downloading on the Rise!

The International Federation of the Phonographic Industry (IFPI) has just released their annual commercial piracy report, claiming that one third of CDs worldwide are pirated. The report itself is a fascinating piece of positioning, because the group wants to maintain two positions that are in tension with each other: 1) piracy is a horrible problem of epidemic proportions that threatens the world economy and 2) the recording industry's efforts against piracy are having an impact.

So the report's headline trumpets the "one in three CDs is pirated claim," but further down in the report summary you find a mix of good news and bad news statistics like this:

• Music disc piracy rose 2% to 1.2 billion discs in 2004, the lowest level of growth in five years but nearly twice the number of pirated discs in 2000
• Anti-piracy enforcement efforts helped in the de-commissioning of 87 CD production lines (up from 68 in 2003) and the seizure of 28,350 CD burners, double the level of 2003
• Sales of all pirate recordings fell slightly to 1.5 billion units, as cassette piracy fell by 28% to 390 million units in 2004
• The value of the world music pirate market was largely flat at US$4.6 billion in 2004 (US$4.5 billion in 2003).
• Pirate sales outnumber legitimate sales in 31 countries
• Pirate operations are getting smaller but more numerous as disc piracy shifts increasingly to smaller-scale high-speed CD-R burning labs.
• CD-R piracy, predominant in Latin America, Southern Europe and India, rose 6% in 2004

So are the pirates winning, or is the industry? I suppose it depends on the metric you choose, and whether or not you trust the report at all. Most of the media reports I've read (e.g. Reuters and InformationWeek) follow the IFPI summary's lead in foregrounding the bad news, which suggests that the bad news is mostly what the industry wants us to hear as they push for more government involvement in anti-piracy efforts.

If CD piracy is indeed as rampant as the report claims, that doesn't necessarily mean that the world is full of immoral music thieves who're out to destroy the world economy. Rather, it's an economic truism that a huge and thriving black market is evidence not of widespread consumer "immorality" or ignorance of/disrespect for property rights, but of artificial price inflation in the legitimate market. Furthermore, the size of the black market for any product is a direct indicator of the degree of overpricing in the legit market. In other words, as some force (like, say, the recording industry's monopoly pricing) distorts prices upwards, people begin to turn in ever larger numbers to the black market for the same goods.

(Note that monopoly pricing isn't the only force that can inflate prices and drive consumers into a gray or black market. High tariffs, governmental corruption, and other governmental and institutional roadblocks to legitimate businesses can squelch a market's formal sector and drive activity into the informal sector. All of these issues are probably factors in the growth of music black markets in places like Latin America and China. See this great TCS interview with William Lewis for more on the topic of the role of protectionism and corruption in fostering black markets.)

My point is that if CDs weren't so outrageously priced, there wouldn't be such a large CD piracy problem. CD prices have risen significantly faster than inflation in the past 15 years, even as CD production and distribution costs have fallen through the floor. What the music industry has is not a piracy problem, but a monopoly pricing problem. The "pirates" are just giving consumers the chance to purchase music in a real market. In asking the government to help them go after pirates, what the recording industry is really trying to do is get the government to help them work against the market by maintaining their monopoly pricing. It's ironic that in the name of "free trade" and commerce, Big Content is actually fighting to counteract the very market forces that they claim to champion.

The same forces described above are also at work in the rise of the market for legal downloads, a market that's now starting to rival the illegal download market:

LONDON (Hollywood Reporter) - Around 35% of music consumers now download tracks legally via the Internet and the percentage will soon pass the 40% who have pirated music, according to a new survey released Monday by Entertainment Media Research...

Fear of prosecution, Internet viruses, and inferior quality were cited as the main deterrents against illegal downloading, the report said. Nearly two-thirds of music consumers said immediate availability was the key reason for buying tracks online.

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