In a new report, Fader proposes a statistical model for using advance orders to predict future sales of albums. His results lead to a clear conclusion: "The more buzz you generate, the more you sell," he says.
Fader?s thinking is controversial. Many people, including the record companies, disagree with the idea that peer-to-peer music networks such as Kazaa, Gnutella and the now-departed Napster have done more to boost record sales through creating buzz than have done to depress them by replacing buying with downloading. Fader says music downloading is a "form of advertising"--and that music companies should shift from making an album just a "collection of songs" into making it a gateway to a complex, multilayered entertainment experience.
Fader says he is troubled by the logic behind the new "Music United" ad campaign, in which leading artists cajole music listeners to stop downloading unauthorized MP3 files. "Artists standing up saying, 'Don?t download our music,' is really the same as movie stars saying, 'Don?t watch our previews,'" he notes.
Whether file trading hurts CD sales is under heavy debate. The pro-file-trading side (including Fader) argues that file trading creates positive buzz, driving even hard-core downloaders to head out to the music store for higher-quality, more-reliable copies of their favorite songs. The anti-trading side says that cheap MP3 knockoffs of popular songs keep consumers away from the record stores, especially when the MP3s can be burned to CDs.
"I know several studies which seem to support the idea that" the buzz the record companies get is greater than the loss caused by theft, says Ron Rodrigues, editor in chief of Radio & Records magazine, adding that he is aware of only one study stating the opposite.
That one study was commissioned by the record industry and conducted this May. It concludes that ?by more than two to one, consumers who say they are downloading more are also purchasing less.? This has led the Recording Industry Association of America, the record industry trade group, to blame the 7.2 percent drop in CD sales over the past year on downloading.
But an August 2002 study by Forrester Research argues that "downloads save the music business." Forrester found that even hard-core digital music downloaders only plan to reduce their CD purchases by 2 percent in the next 12 months, and that the larger digital-dilettante sectors actually plan to increase CD purchasing.
So what?s responsible for the CD slump? Forrester blames the recessionary economy: "Hello?you buy less stuff in a recession," Forrester analyst Josh Bernoff says. Bernoff also cited competition for entertainment dollars by the booming DVD industry (with sales up 80 percent in one year), and a stranglehold on radio playlists by conglomerate Clear Channel, preventing Americans from hearing new or different music.
?My personal opinion is that I believe it?s either a wash, or that the buzz created by file trading is beneficial to the record industry,? Rodrigues says.
Boosting niche categories
While Fader contends that peer-to-peer trading can help all artists, Wharton marketing professor David Schmittlein says Internet-based buzz is only helpful for niche categories of music that don?t get much play in the mass media--world music, traditional music and unknown artists, for instance. Schmittlein plays down not only the importance of the Net in word-of-mouth promoting of mainstream pop--the most frequently downloaded albums--but also the ones that get the most publicity in other venues.
?The Internet is especially helpful where there's kind of an affiliative group that is somewhat established and would likely be on the Internet networking as a group anyway,? he says.
According to Wharton marketing professor Josh Eliashberg, who studies the movie industry, the question at hand isn?t publicity, it's control. Movie studios are terrified of their films getting out over the Net, but they still run advance "word of mouth" screenings to promote buzz. The studios can control who sees those screenings in ways that they can't control free trading on the Net.
Similarly, experts say comparing peer-to-peer music trading to other promotional vehicles such as radio is false; after all, music companies can control which tracks get out to radio. "We?re starting to see more and more movies screened one to two weeks prior to the national release, but that?s different from letting the whole movie loose over the Net," Eliashberg says.
The record companies agree. "We never said that there is absolutely no promotional value to peer-to-peer networks," protests Jonathan Lamy, spokesman for the RIAA. "But the choice (to make music available) should be made by the copyright holder, the artist, the record label, the people who created the actual product--not by someone else."
Record companies have been offering some tentative stabs at legal online music services, offering 'teaser' tracks on band Web sites and streaming top hits over AOL, efforts that Lamy calls "experimental." Slowly, ever so slowly, record labels are starting to agree that online promotion can matter, according to Sean Ryan, president of legal music site Listen.com.
"Where nine months or a year ago the labels were overly concerned about the cannibalization of record sales, they?re really starting to look at these types of (online) promotion as a way to drive awareness and drive sales," he says.
By keeping control over its product, the music industry is just trying to ensure its business model remains intact, Bernoff says, adding that downloading rocks the commercial boat, upsetting assumptions about the value of having a middleman between an artist and a listener. "Once they are not in control of their content, all sorts of questions arise about, 'Who needs a music company?'" he adds.
An integrated entertainment experience
Fader has a prescription for how to solve the "problem" of downloading: Make albums more than just collections of songs, and make record companies providers of an integrated entertainment experience. He holds up as an example the new Bon Jovi album, "Bounce." Legal purchasers get access to an online club offering bonus tracks, a fan club and special advance concert ticket sales. A few other bands, such as Gorillaz, have also tried this route. "Tie together the different revenue streams--concert tours, merchandising, any way to extract value from the artist," he says.
Matt Graves, spokesman for Listen.com, offers another option: Make legal downloading more attractive than illegal downloading. Peer-to-peer, he points out, is a pain. A search by Knowledge@Wharton concurs: While seeking a range of recent albums on the Gnutella file-sharing network, our reporter found plenty of download delays, unreliable sites, bogus files planted by the record labels, and impossible-to-find tracks.
"People pay for a lot of things that they could get for free; bottled water is doing so well that Coke and Pepsi have rolled out water products. You have to make it easier and more enjoyable to pay a little money than it is to steal," Graves says.
To that end, Listen.com?s Rhapsody service provides a wide range of music of guaranteed quality, with track and album information missing from the peer-to-peer services and expert human guides suggesting new tracks, for $10 a month. That makes Rhapsody the best of the legal services so far, according to Fader.
But even Rhapsody doesn?t have what it takes, because record companies still demand too much control, according to Forrester?s Bernoff. He has established a three-point "bill of rights" that legal music services need to meet to beat the illegal file traders. While Rhapsody does well on the "right to find content," their subscription-only policy denies the "right to pay as you want" and they don?t support transferring songs to portable devices, eliminating a "right to control music" that even the RIAA admits consumers have.
Vivendi Universal's eMusic, another service that has gotten high marks, fails in other areas. While eMusic offers the right to control music, it's been treated as anathema by control-hungry major labels, and thus can only offer independent artists. "People do want to buy music under the right conditions," Bernoff says. "But the difference between what we have now and what people want is so great."
Fader agrees. If the music companies loosened up a bit, he says, they could make some serious money online. "People are willing to pay a flat fee to have access to music. Let people pay $15 a month and just let them get access to all the songs, to do as much as they want. The revenue stream," he notes, "would be tremendous."
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All materials copyright © 2002 of the Wharton School of the University of Pennsylvania.