# The False Mathematics of the RIAA

First, let’s consider what actual P2P losses are to the industry.

They are much more difficult to calculate than the RIAA would have you believe. Why? First, downloaders pull songs they would never buy; I have Outkast’s "Hey Ya" somewhere; I consider it a goofy novelty song, and the only reason I have it is that someone else sync’ed it to a Peanuts animation (everyone on stage dancing to Schroder’s piano). It was an amusing but unauthorized use, which I downloaded, smiled at, and never saw again.

Oh ya: The CD that song came from — OutKast’s 2003’s release, Speakerboxxx/The Love Below — sold 10-million plus copies.

Lost sales? Hardly.

Consider the biggest of all downloaders — mostly-broke college students. They have a computer their parents bought them, and the campus gives them a big, fat pipe. They get access to music they would never have bought, resulting in future post-college sales. But the one-to-one lost sales argument is transparently false.

Next, let’s consider what the damages to the industry are. Consider the issues of substitution: What would it cost to purchase  an "unlimited amount" of digitally distributed music? The answer is found in the Napster-to-Go model:

"The Napster to Go model . . . shows that the RIAAs claims of a lost sale for every download to be demonstrably false. If you can download an unlimited number of songs via napster and play them for as long as you continue to subscribe, then the maximum loss the RIAA suffers from a single downloader cannot exceed \$15/month no matter how many songs a person downloads."  — via boingboing

Over the course of 10 years, that represents total gross losses of \$1,800, of which Napster keeps between 15 and 20%. Net loss: \$1,500 dollars.

But wait, there’s more:  The Rhapsody Music Subscription from Real Networks charges only \$10 per month. That’s \$120 per year. Over a decade, the loss downloaders present to the industry by not  signing up for Rhapsody are: lost revenue of \$1,200 (gross). In other words, the total net industry  losses are ~\$1,000 per decade. Hardly as apocalyptic as portrayed.

By approving the Napster/Rhapsody subscription models, the music industry has unwittingly created a viable legal defense, at least when it comes to damages portion of their litigation, for defendants in a RIAA P2P litigation. The claims of losses in the \$100,000 or even \$10,000 are silly — as long as this \$1,000 net loss per decade option exists.

Of course, that doesn’t consider studies (such as the one from Harvard/UNC CHapel Hill) that shows P2P drives CD and concert ticket sales. I only buy music that I hear
and like. Since that hardly happens via the radio anymore, P2P is
my most common source of new music (that, and Apple adverts).

Further, the industry’s disingenous claims that its the artists are getting ripped off by downloaders are rather misleading. (Putting aside the industry’s own long and storied history of ripping off their artists for another day).

A recent NYT article reveals that most musicians make their bread and butter not by selling CDs, but by touring and performing:

"According to a new list of the 50 top-earning pop stars published in Rolling Stone, over the hill is the new golden pasture. Half the top 10 headliners are older than 50, and two are over 60. Only one act, Linkin Park, has members under 30.

The annual list, which entails some guesswork, reverses the common perception of pop music. Not only is it not the province of youth; it’s also not the province of CD sales, hit songs and smutty videos.

While sexy young stars take their turn strutting on the Billboard charts or MTV – or on the cover of Rolling Stone – the real pop pantheon, it seems, is an older group, no longer producing new hits, but re-enacting songs that are older than many of today’s pop idols."

This has serious financial repurcussions for the business model the industry is presently wed to. And the list of artists who are making the big bucks reveals industry mismanagement has led to mostly ignoring the key economic demographic driver of our century: The baby boomers.

Here’s a little secret the RIAA would rather not have you know: Musicians make most of their money performing and touring — not selling CDs or downloads. Rolling Stone has a detailed analysis of the top 50 acts . . . here’s a top 10 list to whet your appetite:

2004 Music Money Makers
1. Prince \$56.5 MILLION
3. Metallica \$43.1 MILLION
4. Elton John \$42.9 MILLION
5. Jimmy Buffett \$36.5 MILLION
6. Rod Stewart \$34.6 MILLION
7. Shania Twain \$33.2 MILLION
8. Phil Collins \$33.2 MILLION
10. Simon and Garfunkel \$31.3 MILLION

Note that 9 of the top 10 grossing performers aren’t the hot new thing — they are the better known rock classics — which the labels have mostly also been  paying little attention to for so many years.

The industry can scapegoat P2P for all their woes, but a closer analysis of the math demonstrates the claim is illusory. (Mis)management is the primary sources of the industry problems.

UPDATE FEBRUARY 16, 2005 11:13am

http://www.washingtonpost.com/wp-dyn/articles/A24838-2005Feb14.html

http://www.nydailynews.com/entertainment/story/280865p-240715c.html

If you keep suing your customers, then soon no one will be watching this show . . .

>
>

Sources:
Balding Rockers and Big Money
JOHN LELAND
NYT, Sunday, February 13, 2005
http://www.nytimes.com/2005/02/13/weekinreview/13lela.html

Napster-to-Go reviewed, math done
boingboing, Sunday, February 13, 2005
http://www.boingboing.net/2005/02/13/napstertogo_reviewed.html

Money Makers
Robert Lafranco
Rolling Stone, Posted Feb 10, 2005
http://www.rollingstone.com/news/story/_/id/6959138/prince?pageid=rs.Home&pageregion=single2

The Effect of File Sharing on Record Sales: An Empirical Analysis
Koleman Strumpf, UNC CHapel Hil
http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf

#### What's been said:

Discussions found on the web:
1. BusinessPundit commented on Feb 15

Barry Ritholtz has exposed the RIAA once again….

2. Jon H commented on Feb 15

” most musicians make their bread and butter not by selling CDs, but by touring and performing:”

Er, no. Phil Collins and Shania Twain can play big shows, and charge premium ticket prices, which boosts their profits.

Performers who are playing small shows at clubs can’t do that. There are no \$150 seats at The Hideout or the Double Door in Chicago. There are no skyboxes. I’m guessing that someone with a modicum of name recognition like Aimee Mann makes a small profit on her live shows. Others probably break even, if they’re lucky.

You can’t generalize from a handful of big-name tours listed and assume “most musicians” are operating under similar economics.

3. Barry Ritholtz commented on Feb 15

thats true — not all musicians can sell out big shows.
But then, how many CDs are these players selling?

Aimmee Mann sponsors her own tours, and they are profitable —

Same for many other bands. Check out Jacob Slichter’s So You Wanna Be a Rock & Roll Star.
http://www.amazon.com/exec/obidos/ASIN/0767914708/thebigpictu09-20
Even a band like Semisonic with big single never saw much revenue from sales

4. Matt Hamrick commented on Feb 16

Now hold on… In my younger days I was the A & R rep for a VERY SMALL record label in Flower Mound, TX. Our artists did not get especially rich from CD sales or live performances. They did, however, frequently “break even” on their live performances. My recollection is that 1 in 7 albums we produced generated enough profit to pay for studio, engineering, duplication, and distribution costs. And the label I worked for barely scraped by with those that did profit.

So I have to agree with the previous poster; bands that aren’t making money from their live shows probably aren’t making money from their albums. So the concept of using digital media files to lure prospective live show attendees isn’t too far fetched.

At the end of the day it’s up to the artist to decide what to do with their music. If they want to release it into the public domain, great. If they want to release it with a Creative Commons license, equally great. If they want to release it with traditional copyright protections (i.e.- you have to ask before you copy,) well that’s just super for them.

In my mind it gets sticky when people start talking about DRM and other technologies that limit “fair use.” Yes, I know, you’re about to make some snide comments about why I’m no longer an A&R rep… ’cause I go around talking about fair use. I’m all for protecting artist’s rights (and even record label’s rights.) But not at the expense of the public’s fair use rights, ‘kay?

I’m a big fan of the concept of the library. Most DRM schemes I’ve seen would make it extremely difficult to purchase media for use in a public library. Fortunately, we can still purchase non-DRM’ed music for use in the library. When I was in school, I learned a lot about music simply by playing jazz and classical albums from the library. And no, I didn’t steal them. When I got out of college and started making money, I bought CDs with all my favorites: Schoenberg, Scriabin, Bartok, Zappa.

So… while I agree with the labels that sharing music on P2P networks is “wrong,” I also think that DRM as the solution is worse than the problem.

5. dsquared commented on Feb 16

Those are the artists who *keep* the most money, not the ones who *make* the most money.

If you were to put up a list of the richest men and women in financial analysis, I’d bet dollars to Atkins-friendly doughnuts that you’d come up with a list of high-rolling hedge fund managers and private investors. The fact that Fidelity and Capital wouldn’t appear on that list doesn’t mean that what they do isn’t important.

6. Barry Ritholtz commented on Feb 16

But the point is htat the labels misrepresent the impact of P2P — of course, some artists will feel some impact.

But the reality is its the labels who bear the brunt of 90% of P2P’s impact — not the artists. That hasn’t stopped the RIAA from using artists to put a Human face on the issue.

7. Nätverkssamhället commented on Feb 16

Hur mycket förlorar egentligen skivindustrin?

The Big Picture smular sönder argumenten: The Big Picture: The False Mathematics of the RIAA Tjänster som Napster-to-Go gör att skivbranschen inte längre kan hävda att man förlorar så mycket på nedladdningen av…

8. Darknet commented on Feb 17

The RIAA’s funky math

Ouch! Barry L. Ritholtz of The Big Picture nails the RIAA: The feedback on the P2P downloading debate has been terrific; Let’s add a few additional bullet points into our repertoire of arguments: First, let’s consider what actual P2P losses are to the…

9. Darknet commented on Feb 17

The RIAA’s funky math

Ouch! Barry L. Ritholtz of The Big Picture nails the RIAA: The feedback on the P2P downloading debate has been terrific; Let’s add a few additional bullet points into our repertoire of arguments: First, let’s consider what actual P2P losses are to the…

10. Darknet commented on Feb 17

The RIAA’s funky math

Ouch! Barry L. Ritholtz of The Big Picture nails the RIAA: The feedback on the P2P downloading debate has been terrific; Let’s add a few additional bullet points into our repertoire of arguments: First, let’s consider what actual P2P losses are to the…

11. Toby commented on Feb 20

For the best part of several hundred years, the whole of what we can call “the music industry” was driven by live performance. Composers were paid to write for public, church or court performance: musicians and singers played. There was no broadcasting, no sheet sales, no recording.

Then came the arrival of sheet music sales. That allowed composers to make money directly from the public, but performers still had to make their money live.

Then came primitive recordings, and then radio, then better recordings and then TV. By the 1950s the music industry became one in which recordings and broadcast fees were important, and so it remained for about 50 years.

But maybe that era is now over. Recording revenues are (apparently) falling, while performance revenues are steady and maybe even increasing. We all know examples of bands who effectively make all their money from gigs (The Grateful Dead for most of their career; Phish more recently) but the same is true of the majority of classical and jazz artists and pretty much always has been. The Dead’s tradition of encouraging bootlegs didn’t hurt ticket sales, and when they did have a rare hit like Touch of Gray it’s main importance was in briniging in new concert fans.

We may look back on the era of high (and highly profitable) record sales as an aberration in what is otherwise the long tradition of making a living by live performance. If the RIAA haven’t considered this possibility then they are fools.

12. The Raw Prawn commented on Feb 21

Carnival of the Capitalists

Welcome to the President’s Day edition of Carnival of the Capitalists, the weekly round-up of business and economics blogs.

While you’re here, please take a look at a few of the other posts. The Raw Prawn primarily deals with business, economics, …

13. Jeff Moore’s Blog commented on Feb 21

Carnival of the Capitalists

The blog hopping [URL=http://the-raw-prawn.blogspot.com/2005/02/carnival-of-capitalists.html]Carnival of the Capitalists[/URL] has become one of the highlights of my Mondays. I usually end up reading more than half the linked to articles. My Favorite…

14. James commented on Feb 21

Absent your analysis is the effect of P2P downloading on the songwriters, the source of the music artists perform. A huge amount of the music popular singers perform (Britney, etc.), and an even larger portion of other genres (country especially) is not written by the artists, so it makes for an incomplete argument to look out only for the artists in this equation.

While royalties from live performance provide income as well, much of the songwriters’ income comes from the mechanicals they receive when albums are bought.

That said, enjoyed your analysis, just wanted to bring up another side that was notably absent from your considerations.

15. Dan G commented on Feb 21

That’s \$120 per year. Over a decade, the loss downloaders present to the industry by not signing up for Rhapsody are: lost revenue of \$1,200 (gross).

It’s actually quite a bit less: What’s the NPV of a \$120/year cash flow?

16. Dave commented on Feb 21

OK, I’m 35 years old, and there are some bands that I like out there, but none get much airplay. It seems that the 3 mega-companies that own all the radio stations have pigeonholed me into the “classic rock” era. If I hear one more Who/LedZep/PinkFloyd song, I’m gonna blow my brains out.
If I’m in my home, I can troll the webradio casts to see if there’s some interesting music out there. Not at work, and certainly not able to in my car.
So, what does one do to get exposed to new music?
I used to buy a whole lot of albums & tapes back in the day. But now at \$15.99 plus, with no exposure to new music, I might buy 6/year, all guaranteed hits.
If they were \$10.00 each, I’d buy a whole lot more and be willing to experiment.
To top it off, I happened upon a great new band, wanted to put one of their songs on a mixed cd that I was giving to friends, but their DRM (or whatever copy-protection they have) DID NOT ALLOW ME TO SHARE THIS BAND WITH MY FRIENDS. So, instead of telling them how great they are, I’m going to spite them and not tell. Yes, it’s juvenile. But I used to be up on turning my friends onto great new bands. Now it’s different. And they’ll never know, or BUY, that band’s music. And for denying me “Fair Use”, I’m glad they’ll never know of the band.

17. James commented on Feb 22

I know it goes without saying, Dave, but your opinion of what’s “fair use” and the official definition of “fair use” in the Copyright Law are two very different animals.

While the law itself is vague, the uses it specifically mentions are criticism, research, news reporting, teaching, et al, as examples of fair use, so long as the segment copied is only a reasonable portion of the complete work, and not the entire work.

Personally, I’m coming to believe that all this digital encoding nonsense is absurd, but they’re operating well within the existing (absurd) law in doing so. Hopefully in very short time, we’ll see a new model for copyright protection and music consumption. Til then, we’re still bound by the law, no matter how silly it is, no?

18. Managing Rights Management commented on Feb 22

Barry Ritholtz, “The False Economics of the RIAA

Do people mainly P2P download songs they wouldn’t otherwise buy? Do musicians make most of their money from performances? Economist and blogger Barry Ritholtz answers these and other questions and in doing so, does a couple of numbers on The

19. Managing Rights Management commented on Feb 22

Barry Ritholtz, “The False Economics of the RIAA

Do people mainly P2P download songs they wouldn’t otherwise buy? Do musicians make most of their money from performances? Economist and blogger Barry Ritholtz answers these and other questions and in doing so, does a couple of numbers on The

20. Managing Rights Management commented on Feb 22

Barry Ritholtz, “The False Economics of the RIAA

Do people mainly P2P download songs they wouldn’t otherwise buy? Do musicians make most of their money from performances? Economist and blogger Barry Ritholtz answers these and other questions and in doing so, does a couple of numbers on The

21. Online Music Blog commented on May 18

The False Mathematics of the RIAA

Barry Ritholtz has posted an article over on The Big Picture that outlines informaion that will not come as a surprise to most OMB readers, but is important nonetheless for its specifics:

Further, the industry’s disingenous claims that its the artist

22. Online Music Blog commented on May 18

The False Mathematics of the RIAA

Barry Ritholtz has posted an article over on The Big Picture that outlines informaion that will not come as a surprise to most OMB readers, but is important nonetheless for its specifics:

“Further, the industry’s disingenous claims that its the artis

23. Online Music Blog commented on May 18

The False Mathematics of the RIAA

Barry Ritholtz has posted an article over on The Big Picture that outlines informaion that will not come as a surprise to most OMB readers, but is important nonetheless for its specifics:

“Further, the industry’s disingenous claims that its the artis

24. Michael commented on Jun 7

25. Cindy commented on Aug 23

I am a Uni student and I use P2P network to share music.

The reason why I’m doing that is there’s a simple principle for us — If I have never listened to the music, I won’t buy it. One reason is because the record company today is try to sell instant stars and rubbish to anyone. Another reason is I don’t listen much radio. I don’t agree with people who said the radio can still do the promotion for musicians, at least, not for young students anymore.

Students spend much more time on Internet than listening to radio, that’s why they are likely get information on internet. No pad company will put it’s advertisement on the door of the men’s toilet, right? So why musician should advertising themselves through a media that will hardly get result, or for a particular population group it won’t work?

In my home country, I can say that the record industry is mainly depends on young people. That means, they are the biggest P2P user group, and some of them do enjoy the music which is not available on where they live. That’s why some company started their business by making pirate copy of CD which the original copy was over priced or hard to access. And for these CD for some stupid reason cannot be imported, people will smuggling them in anyway (we are not talking about border control issue here ^.^).

I think the music industry, which include musicians really have to take a serious look at themselves, why some CDs are all over the shelf and no one want to buy, at the same time still people downloading music through P2P networks. The product range, the price, almost everything…

I’m a girl, and I probably spend more money on buying records than clothes, and most my female friends do as well.

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28. Lumpy’s Corner commented on Jun 23

Batton Passing

I have finally had a chance to catch up with some of my blog reading. I am noticing many post about passing the batton. It seems that many a blogger are now posting how much hard drive space is…