File sharing and the Music Industry

Days ago, Nine Inch Nails released its new album, The Slip. What made the album notable was not that it was released digitally, but that it was released for free (if you want to download it, click here).

What possessed Trent Reznor (who is essentially the entire band) to release his hard work free over the internet? Surely such an act is one of absolute stupidity - he is giving away for free an album he has worked on for months, a process that has cost him money in studio time, musician hire and the inability to make money by playing live shows.

While Radiohead's In Rainbows was the first instance of a high profile band releasing an album for free, it has been Reznor's two releases with Nine Inch Nails (The Slip and Ghosts I-IV) that have shaken the music world to its core. The reason? While Radiohead and other bands have maintained complete copyright control over their musical work (which, despite being offered for free, precludes any form of legal file sharing), Reznor has licensed both The Slip and Ghosts I-IV under a Creative Commons Attribution-Noncommercial-Share Alike license. What such a license does is release many of the rights that Reznor has over his work. Put simply, the license allows anyone to copy, distribute and modify his work free of charge. Thus if I decided to burn ten CDs with The Slip on it and give them to friends, I am acting well in the bounds of the license that Reznor has placed his work under.

Of course, there are limits to the particular license that Reznor has chosen to use. The most important limit is that no one is allowed to use copies of the music for commercial gain. This means that I can give away those ten CDs to friends, but I can't sell them.

So what is Reznor thinking? Not only is he giving away the album for free, he has also given up much of the rights he has over his work - and has done so permanently. Is he committing financial suicide? Is such an activity merely a faddish attempt at gaining popularity? Is he an anarchist or socialist who believes that private property rights should be given up to the masses? There's no doubt that Reznor is not a fan of the music business. He has publicly called upon music fans to break the law and steal music via filesharing - including his own. But surely such actions would cut his own throat?

In order to understand these questions, we need to delve into the "product" itself and work out important things about it. For starters, music for most people is an emotional experience. Whether your preference is to lie back and listen to Beethoven or bang your head to Iron Maiden, the fact is that music has the capacity to affect human emotions. That is why certain musical groups and certain musical genres have committed fans who generally hate other musical groups and other musical genres - hearing music you do not like results in a negative feeling, while music you do like results in a positive feeling.

The fact that music grabs our emotions is important - it means that a person's taste in music has little to do with objectively derived facts measured in a scientific manner, and more to do with the way in which a particular tune, group or genre affects the way they feel. In that sense, music is almost wholly subjective in its effect. So while some people who argue that classical music is "better" (or that punk music is "better") they are people who have made wholly subjective choices, while at the same time making wholly subjective judgements upon songs, groups and genres that they don't like. (Except, of course, for Country and Western music, which must be destroyed if mankind is to progress.)

The result of this emotional and subjective approach to music means that people begin to emotionally attach themselves to certain songs, groups or genres. In layman's terms, this means they become a fan of a particular band or genre.

And this happens all over the place and occurs multiple times. While a person may like one certain band over and above all others, it is more usual for a person to have quite a few different bands that they like - particularly if these bands share a common musical genre. This commitment to groups and genres means that the individual is likely to feel a sense of loyalty towards their musical likes, much in the same way as sports fans might support a certain team. Merchandise like posters and clothing often supplement a musical group's income because fans are more than willing to spend money on supporting their favourite bands.

All this is important to take into context when you examine the rise of free downloads, especially in light of the previous two releases by Nine Inch Nails.

When Ghosts I-IV came out in March 2008, I was one of those who immediately downloaded the album. More than that, I used bit torrent software to download the album in CD quality. A few days ago I saw this same album at a CD shop... and I bought it.

So while you might wonder about Reznor's sanity in releasing the CD for free, you might now even wonder about my own sanity in purchasing a "legitimate" copy of an album I already had sitting on my hard drive - and not just some low bitrate copy, but a CD quality one.

But if you're concerned about my own financial sanity, you must therefore question the sanity of the probably hundreds of thousands of people worldwide who have done exactly the same thing, including those who pushed the album to number 15 on the Australian music charts. Who were all these people who bought the album? Were they merely ignorant of the fact that they could get it for free, or were they insane enough to buy what they already owned?

The answer is that fans of bands will still wish to own a "physical" copy of the music they like, even if they have a copy (legal or illegal) sitting on their hard drive. And this physical copy mustn't just be a burned CD, it must be legit.

Of course this sort of argument isn't completely universal - people's own finances will still dictate what they want or not, which means that poorer fans are probably more likely to be happy owning illegally burned CDs or illegally downloaded files while richer people are more likely to own legit CDs that they have ripped onto their own hard drives.

It might be tempting to label Reznor a fool for making his music free and labeling his fans as saps for buying what they already own - but understanding these strange forms of market behaviour is essential in working out what file sharing is doing to the music industry.

Bands have traditionally had three forms of income - income from recordings (CDs, singles, radio play), income from concerts and income from merchandise (Posters, T-Shirts, etc). There are obviously other ways musicians can earn a living, but these three are the ones that I want to focus on here.

I started buying CDs in 1986. It wasn't until about 2004 that I had the ability to burn my own CDs and it wasn't until 2005 that I finally discovered how to transfer my CD collection onto my hard drive. Moreover, it wasn't until this year that I began to download full length albums from the internet. It was, in fact, this latter experience which really affected the way I thought about file sharing and also my own behaviour.

The first album I downloaded over the internet was Methodrone by The Brian Jonestown Massacre. The band had made the album available to download for free at their website. The quality of the file - its bitrate - was, at 80kbps, low enough to make the file small but high enough to enjoy the music without any obvious shortcomings. I enjoyed Methodrone immensely, and began listening to it on a regular basis. I was excited by the music and thus an emotional connection between myself and the band developed - I became a fan. Knowing that I wanted to listen to the album at its highest level of quality, I eventually ordered it from Amazon and it now sits in my CD collection.

Nevertheless, by buying what I already owned, I realised that my own behaviour seemed quite illogical. I asked myself many times what the point was - was I making a rational or irrational choice? In some respects, purchasing any music is irrational (do we really need it?) but I felt that my choice to buy a physical, high quality copy of something which was simply software was actually rational. After all, hard drives fail and burnt CDs aren't all that reliable. Owning the actual CD was therefore similar to having a "back-up" of important software. Just as everyone has their Windows CD (or Linux CD) sitting in a drawer somewhere just in case they need a reinstallation, so do music fans need to have a reliable, physical copy of their music, just in case they need to rip them again in the future onto their hard drives and/or mp3 players. Besides, the album pictures look nice.

And herein lies one reason - whether it is rational or not - why Trent Reznor is happy to make his albums free to download and why so many people these days practice illegal file sharing. Making it free to download, copy and distribute does not necessarily result in the death of the album and does not necessarily result in an inability to sell CDs of these freely available albums.

Albums, traditionally, have been the music industry's main money earner, which is why illegal file sharing has led many in the industry to attempt prosecution of file sharers. In the case of big bands, the strategy would be for a band to tour live in support of an album. Thus, by appearing live in concerts, bands would be able to significantly lift the amount of people "committed" to the band, which would then result in more albums being sold.

There is still a lot of money, however, that can be made by bands from touring alone. Paul McGuinness, manager of U2 and an ardent opponent of illegal file sharing, revealed in a January 2008 speech that (U2's) Vertigo Tour in 2005/2006 grossed $355m and played to 4.6m people in 26 countries. Obviously that figure is not a net figure, but you can see just how much money fans are willing to pay to hear their favourite band play. This revelation by McGuinness shows that the music industry is far from dead, and that, even with CD sales declining due to file sharing, well known bands can continue to make a profitable living.

In this context, therefore, it seems possible that bands could actually use free music downloads in order to augment their touring income. In this sense, rather than the tour supporting an album (as it was done in the past), the free album ends up supporting the tour. This is exactly what is occurring with Nine Inch Nails. The day before The Slip was released onto the internet for free, Nine Inch Nails' North American tour dates were announced. While it may be almost impossible to stop illegal file sharing, it is, in effect, quite easy to prevent people from entering a concert hall without paying for the ticket, which means that the 2008 North American tour is likely to be quite a profitable one for Nine Inch Nails.

The third area of income - merchandise - is unlikely to be affected in any negative way by the availability of free downloads. "Official" merchandise is available to purchase directly from the band's website, and, because merchandise is physical, it is impossible to "copy" without it losing its legitimacy. Gone are the days of bootlegging merchandise - if you want legit merchandise, you go to the band's official website.

The profitability of merchandise was central to the initial release of Ghosts I-IV by Nine Inch Nails. Apart from the free download, fans had the choice of paying for additional items, ranging from a direct delivery of the CD ($10 plus postage) to an "Ultra deluxe limited edition" that included a Data DVD containing each individual track available for remix, a Blue-Ray disc with the album in high-definition 96 kHz 24-bit stereo, a 48 page booklet, high quality photo prints and even a vinyl pressing of the album that can be played on old record players ($300). This latter edition sold out within minutes of the release. It was later claimed that Reznor had made at least half a million dollars from this merchandise within the first few days. Not bad for a free release!

The fact that Reznor has now twice released musical work for free - and has benefited from it financially - means that many artists and recording company people are taking notice. Initial disbelief about the profitability of such actions is beginning to dissipate. People have already taken notice of Radiohead's release last year and a host of smaller bands have used similar methods, though none as thoroughly well thought out as Ghosts I-IV and The Slip. Reznor's actions have sent a shockwave throughout the industry since it is presenting a completely new and counter-intuitive business model that takes into account the reality and advantages of the internet.

Of course there are many within the music industry who will resist. Dinosaurs like Paul McGuinness will continue to argue for complete copyright ownership and the importance of law enforcement to prevent illegal file sharing on the internet. Moreover, even artists themselves, so wedded to the system after so many years, will argue that the old ways should remain. This was essentially the argument of Billy Bragg, the socialist singer/songwriter who argued that musicians are like workers whose work should be compensated for, while file sharing "robs" them of their hard earned cash.

I have one thing to say to all these people - adding machines. Previous to the invention of cheap transistors, accountants all over the world needed expensive mechanical adding machines. These adding machines were reliable and indispensable. However, with the invention of calculators, mechanical adding machines were rendered obsolete. The factories which made adding machines were shut down and the workers were laid off. The businesses who made adding machines had to diversify or shut down. This was a difficult time for the industry, yet the result - cheap, reliable electronic calculators - made the world richer. If you look at the amount of money lost by businesses and individuals who benefited directly from the production of mechanical adding machines, and then compared that to the amount of money saved by businesses and accountants the world over, the result is that it was a net benefit.

If you look at the current problems with file sharing and the music industry, you'll see a similar pattern emerging. A new technology requiring new business models begins to make old technology and old business models obsolete. Where the music industry is at the moment is like the world between the mechanical adding machines and the transistorised calculators. The old business model of record companies and musicians with copyrighted music is coming to an end, a new business model of individual artists and bands and smaller music companies releasing free music while relying upon live concerts and internet merchandise sales is the one beginning to exert itself.

As I finish up here, let me just explain how my own thoughts have changed over the years. I was never a Napster user and I did not have a personal opinion about what was going on. While I think the law is important to obey, I realised a few years ago that the file-sharing phenomenon was so massive and widespread in the online world that it would be impossible to police. Laws that cannot be enforced eventually get changed, though I would guess that those whose salary depends upon that law being enforced (ie the music industry) will not go down without fighting, hence the occasional lawsuit against file sharers in the US.

As it dawned on me that this new business model was emerging - one that is actually of more economic benefit to the artists and to their fans - I realised that my own inhibition against file sharing needed to change. Thus I can confirm now that I have not only downloaded music from the net that I have not paid for, but have, in fact, copied some of my own CDs and placed them online for others to download for free.

Nevertheless I do admit that my own conscience (I'm an evangelical Christian) is still uneasy about this new behaviour of mine. Have I become a thief? Have I allowed others to become thieves by making copies of some of my CDs available to illegally download?

Yet despite this unease, I actually believe that I am simply doing only what is going to inevitably become legal in the future. Moreover, while I can certainly say that I fully intend purchasing the CDs of music I have downloaded (assuming I like it - if I don't I'll just erase it from my hard drive) it would be foolishness to simply take me at my word. Nevertheless I am convinced that one natural result of making albums free to download will be the eventual purchase of these CDs by those who become fans as a result of listening to these free downloads. Thus I have been busy telling people online about how great certain bands and/or albums are while pointing them to a url that they can download them from - and I have done this knowing that once a person becomes a fan they will likely want to buy the CD. So while it might seem that my actions result in musicians losing money, it is likely that the opposite is true - more people are likely to buy the CDs, even though they already have it sitting on their hard drive. In this sense I am actually doing these bands and musicians a favour by making their music freely available. I'm helping them move out of the old business model and into a new one. The only people who make money out of this are the musicians themselves.

Moreover, while those in the industry may point to falling CD sales as evidence that file sharing is destroying the industry, I would point out that people / consumers / fans are becoming more discerning in their taste and are downloading music files as a way of "try before you buy" - if they like it they buy it, if they don't they erase it from their hard drives. Gone are the days of buying an album on impulse alone and then regretting it later. Furthermore, the overwhelming evidence is that those who download music files are from the younger generation (under 25) who are likely to retain their love of certain bands and/or musicians as they get older, thus making it likely that they will continue to spend money in the long term going to concerts and buying merchandise and buying CDs of music that is already sitting on their hard drive

This is the way music is headed. The old ways are dying and the new ways are thriving. Unfortunately there is still a lot of "clout" amongst the music industry, and they will continue to make life difficult for file sharers.

(Much of this article was written whilst listening to downloaded music)