Digital Music Leads the Way

Total music sales grew 10% this year, which is a positive trend the music industry has not seen in a long time.  More interesting is that digital sales led the way, with a 27% increase in digital track sold and a 32% increase in digital album sales.  However, the number of physical albums sold is down 14%, including an 8.6% decrease in physical albums sold by e-commerce sites.  I'm sure that many will point to the irony of this being revealed around the same time the RIAA announced it was going to stop sueing their constumers for digital file sharing.  Before anyone does this, I will disagree since the RIAA was never against digital downloads, but illegal digital downloads since they receive no profit.

Rather, I want to comment on the idea that people still prefer albums over singles.  While it's true that album sales are still growing faster than digital tracks, it would be wrong to conclude that people still prefer albums.  All that we can say is that it is plausible.  However, some necessary controls need to be accounted for before this conclusion can be drawn.  For example, the success of AC/DC's Black Ice suffers from the same problem as In Rainbows by Radiohead.  Both are by very successful bands and would do well regardless of format and distribution.  That's like drowning a salad in ranch dressing and claiming you are being health-conscious since you are having a lot of veggies.  One trumps the other.

Second, it is not really fair to compare albums to a group of singles, since their cost structure is different.  Most online retailers charge a standard cost to a single track (e.g., $0.99) and then a standard cost to an album (e.g., $9.99).  The problem is that the album cost is regardless of the number of tracks.  This changes the worth of an individual track.  For example, say there are 15 songs on the album and I really like 7 songs.  The real cost of the remaining songs is not eight dollars, but $3.  While I would never buy one of these songs for $0.99, they might be worth $0.38.  This is a variable that needs to be accounted for.

Third, a more important point is that iPod is the place where music dies since 64% of songs are never played.  It would be unwise of the music industry to ignore this problem, since they need satisified customers to continue buying music.  Two possible ways to increase the "playrate" is through a new pricing strucutre and recommendation technology.  The former can be solved by bundle rates.  As I mentioned above, one possible reason for the continued success of digital albums sales is the different pricing structure of an album vs. a  set of singles.  This leads to a lot of songs being bought, but never really played.  By allowing users to mix and match to make their own "album bundle" could greatly increase customer satisification.  For example, 1 song for $0.99, 10 songs for $8.99, 15 songs for $10.99, etc.  There would be no requirements on which songs are selected in the bundle.  Related is the need to improve and implement recommendation technology.  Often ignored in economic analysis is the cost of time spent on the consumer.  Searching for music is a laborious task without recommendation and discovery tools.  Even iTunes only recently launched Genius.

In conclusion, the claim from artists (especially) that people still prefer albums is still undecided.  There is reason to believe this is plausible, but there are still some questions that need to be addressed.