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Pumping out songsand pumping up prices?(Economist.com Via Thomson Dialog NewsEdge)Record companies around the world are reaping ever greater sums from the digital downloading of songs. But as online music moves into the mainstream, the industry faces suspicions that it is fixing prices for tunes. That will hardly endear it to consumers as it continues to wage war against piracy APPLE'S iTunes recently hit a significant high note. Last month, the world's leading digital-music store boasted that it had sold its billionth downloadan impressive statistic considering that the online segment of the music industry hardly existed three years ago. More impressively, Apple and other providers of legal downloads have had to battle against online pirates that offer the same thing for nothing. But this week, the beautiful sounds of digital cash registers ringing were drowned out by the jarring noise of regulatory intervention. According to reports in the American press, the Department of Justice (DoJ) has begun investigating a number of big companies for possible collusion over the wholesale price of digital music. As with other financial scandals in America's recent past, the running was made by Eliot Spitzer, New York's attorney-general. In December last year, Mr Spitzer launched a probe into the wholesale prices top music firms were charging to companies that retail downloadable music to consumers. Sony/BMG and Warner Music confirmed they were approached. Some sources suggested that Universal and EMI were also part of the investigation. It is probably no coincidence that regulators are taking more of an interest in online music just as it is becoming big business. Revenues from digital downloads hit $1.1 billion in 2005, three times more than the previous year, according to the IFPI, a record-industry body. Digital sales made up 6% of the recording industry's global sales. The DoJ and Mr Spitzer appear to be concerned that the industry is overstepping the mark as it tries to squeeze as much profit as it can from its new source of revenueespecially since offline sales of CDs are so lacklustre. Despite the fast growth in digital downloading, overall music sales are expected to remain flat this year after falling by over 15% in the past five years. Online sales are set to become increasingly important for the business. Estimates suggest that within ten years around a quarter of the music industry's revenues will come from digital downloads. Not only are the streets awash with people happily plugged into iPods and other digital music players, but mobile phones that can play songs are also gaining ground. Of the $1.1 billion spent last year on digital ditties, around 40% went on downloads to such phones. Apple pioneered the business model adopted by most retailers of digital tunes. In America, the firm charges 99 cents per song whether it is a new hit, an old favourite or an obscure track dimly recalled from a misspent youth. For now, Apple's dominance seems secure. It accounted for 67% of all digital players sold in America last year, and for 64% of all digital music sold around the world. But it has not all been smooth for the industry leader. Apple is at odds with the big record labels over the pricing structure for their songs. The labels have been pushing a flexible model, under which older tunes are sold more cheaply than current hits, with the biggest hits commanding high prices. Apple, on the other hand, believes that a flat rate will foster the growth of the online-music market by keeping the price of new songs low. Steve Jobs, Apple's boss, went so far as to call the music industry greedy last year for wanting to raise prices. If the industry is colluding to keep the price of digital music high to the retailer, and this price is passed on to consumers, it could drive music-lovers back towards illegality. Though some of the early pirate sites have either closed or, like Napster, gone straight as subscription services following legal action brought by the music majors, illicit downloading is still widespread. The IFPI reckons that 885m illegal music files were available on the internet in Januaryand by some estimates, for every track that is downloaded via a subscription service another 75 are grabbed illegally. It is small comfort to the music business that at the peak of the file-sharing boom, some 1.1 billion infringing files were available. The recording industry has pursued the illegal file-sharers vigorously since Napster's closure as a pirate service in 2001. Last year, for example, America's Supreme Court ruled against Grokster, a firm that made software which could be used for the purposes of illegal file-sharing. And the industry has taken legal action against some 20,000 of the most prolific downloaders of music files under copyright. It has also launched public-information campaigns to lambast pirates and sing the praises of legal downloading. The music giants like to think they are finally getting the better of the illegal file-sharersor have at least found a way to make decent money from digital music. If they are now shown to have colluded to pump margins up, they will only have themselves to blame if illicit downloading starts to gain ground again. The pirates may be past their heyday, but they will continue to wield their cutlasses. |