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Articles > Entertainment May, 24, 2012

How piracy has changed the music industry for the better

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The UK has always had one of the world’s most diverse and successful music industries, and has been the worlds largest exporter of music for quite some time now. In 2009 the combined revenue of the industry as a whole was around £3.9bn up 5% from 2008, and between 2006 and 2010 sales of music have risen from 266 million units to 281.7 million units.

And all of during the worst economic downturn since the great depression coupled with the apparent industry crushing threat of piracy (which apparently cost the industry around 2 billion downloads last year). The music industry, it would appear, seems to have done pretty well for itself. This has a lot to do with the new shape of the music industry, one that has come about because of an unspoken drive to capitalise on the spread of music through online piracy. The new model revolves around a significant shift from investment in music recordings to investment in live shows. 

This makes good economic sense in many ways, as file sharing has gained in popularity (a recent survey found that 11% of the UK have engaged in the activity), the supply of recorded songs has increased dramatically. In some cases – specifically when you look at successful chart hits, the supply has increased to such a degree, that logically charging a price higher than 0 (or in the case of the UK industry – imposing a bill like as the Digital Economy Act) is unlikely to yield results that are financially viable in the longterm. 

It’s also important to differentiate between a lonely teenager uploading tens of thousands of tracks onto the internet in return for online kudos, and genuine music fans sharing tracks between themselves – doing the industry a service by introducing potential fans to bands with far more precision than the record labels ever could. Unfortunately it will be the latter group, those who file-share on a small-scale, that are most likely to find themselves being caught out by the new legislation – purely because they don’t have the technical knowledge possessed by the lonely tech nerds which allows them to carefully cover their tracks in a way that enables them to operate undetected whilst flooding the internet with a multitude of pirated songs – just to prove they can. Surely it’s time record labels stopped wasting resources trying to fight those who give them an opportunity for free promotion on an unprecedented scale. 

Indeed the existence of such blunt legislation has led the industry to develop better ways to encourage consumers to pay for their downloads – the removal of DRM and increased bit-rate of iTunes tracks is one such example.

There are those who would (perhaps quite rightly) argue that if bands have the profit motive, they are more likely to produce songs of a higher quality. However I would argue that the profit motive is still there, it just comes in the form of live performance which is far more profitable than CD sales as I’ll address later. There are also those who question the morality of using bands as a money making machine however a far more interesting question would be – how could we use this increase in awareness of music and free publicity to maximise revenue and create a more sustainable long-term business model.

Earlier I mentioned that investment had shifted from recorded music to live performance, (37% of turnover in the industry now comes from live performance, only 3% behind music sales, royalty payments and licensing combined) and is now the fastest growing part of the industry. Moving away from the UK to the US, since 1999 ticket-sales have tripled in value, from $1.5 billion to $4.6 billion today, and the trend has been nearly identical over here.

Demand for live shows is inelastic, this is mainly down to the fact that supply is fixed – if one U2 concert on a particular night sells out, there is no other way to see U2 live that night. You can share round a bootleg recording of a concert, but the experience will never rival that of actually attending a concert. 

Live shows also heavily support the merchandising industry, far more than CD’s ever did, especially with the amount of merchandise on sale at concert. Bravado, a company that specialise in music merchandise have seen their revenues more than double since 2007 when Universal Music Group acquired it. Tom Bennett, the head of Bravado (music merchandise company) puts this down to the growth in the live music industry. Again because clothes cannot be digitally shared or copied on the scale that recorded music has (it’s not impossible to produce fake merchandise but the official retailers will often sell direct to fans inside gig venues – a pitch unattainable to dealers of fake goods), it is likely to fair better in the future – in October 2010 The Economist observed that “Artists are not so much selling music, as using music to sell”. 

Perhaps what’s most ironic is that despite the fact that piracy has been hailed by the media as the music industry’s downfall, it has instead done quite the opposite; boosting the one aspect of the industry that employs more people and connects more industries than the rest of the music business put together. 

On top of all this the cost and availability of home and studio recording equipment has fallen significantly over the years, making it cheaper and easier for bands to release tracks that are of a comparable quality to those released on major labels. These tracks can then be distributed for free, gaining the band exposure on a previously unattainable scale (particularly useful for bands who seek to cater for a niche in the market) and free publicity, they can then use this to build a fan base, sell merchandise and put on live shows. Making the artist far more money than they would have done if they had focused their attention on selling recorded music (on average an artist attached to a record label only receives 15% of the profits from every copy of their album sold).

“I image that, in the future, recorded music will be looked on by the industry as we have always looked on video clips: they are expensive to produce, no-one expects to make any money from their exploitation, yet they serve to attract people to your product.” 
– Billy Bragg

Piracy is an opportunity to increase innovation and efficiency in an industry that badly needs it and on a scale that has never been seen before. Labels can no longer continue operating as they did before the dawn of the internet, they should be grateful that piracy has forced them to address their faults and shift to a more sustainable long-term business model. That is not to say there is no place for paid music in the modern world, there are still plenty of people willing to pay for music and it would be foolish for the industry to deny them the privilege, especially given the success of online retailers such as iTunes but the labels should view it as a form price discrimination between those who are willing to pay and those who are not.

Visit Pointless Economic Musings

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  1. Simon

    Extremely interesting take on the whole ‘destruction of the music industry by piracy’ view some very valid points, i would be interested to see what you have to say on future issues affecting youth culture. I’ll be looking out for your articles 🙂

  2. Tom Dulson

    Fair point well made. I’d also add that this proposed model would root out artists that can’t perform well live, leading to less shitty manufactured acts.

    There is however one problem – The music industry uses fear tactics to discourage piracy. These fear tactics have a stronger effect on (for the sake of argument) 13 year old girls.

    This means that artists who cater to older teenagers are less likely to make money from album and single sales than artists aimed at 13y/o girls.

    This is why the charts are saturated with bands like one direction – they cater to the only audience that actually still pays for singles.

    We see a parallel in the album charts – but instead of 13 y/o girls it’s people who still buy CDs (ie older people).

    Piracy is great for promotion, artists that make their money from shows and for viral marketing (best example of this approach is Odd Future, who have given away several albums for free but make serious money from merch and shows). The downside is that stubborn, short sighted labels will no longer invest in these artists, instead placing their bets on the tried and true shitty boybands.