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The Recorded Music Industry in the Digital Age

Updated on October 13, 2013


The recorded music industry (RMI) faced major upheaval after the highs of the CD music sales boom that began in the early nineties and ran into the new millennium. Caught unawares as illegal music downloads took hold of consumer behaviour, the industry has struggled to restore the status quo ever since. By examining the use of copyright litigation, the rise of legal download alternatives, and the increasingly popular musical streaming technologies, we can get an understanding of how consumers relate to music in the digital age. It is also worth observing the plight of the recording artist in the current climate.


Shawn Fanning’s Napster file sharing service is widely acknowledged as the precedent for the illegal peer-to-peer (P2P) music services that welcomed the RMI into the digital age. Napster and later services such as Kazaa, Grokster and Limewire provided networks that allowed users to share easily compressed music files with each other (Ericsson 2011, 1794; Liebowitz 2006, 6). Consumer behaviour began to move away from the commercially available CD, preferring to access music files for free, even if they lacked the standard audio quality that the CD presents. (Sexton 2009).

Copyright Wars
The willingness of a great number of people to undertake illicit behaviour in order to avoid paying for music greatly worried the recorded music industry, and in response to declining physical music sales they instigated what Patry (2009) calls the ‘Copyright Wars’ (Bylin 2009). The original form of Napster was shut down by a preliminary injunction granted to A&M records in 2001 (Liebowitz 2001, 6). Despite a move away from a centralised server, the second generation of P2P networks also faced legal proceedings (Ericsson 2011, 1794). By late 2003 both the Recording Industry Association of America (RIAA) and the British Phonographic Industry (BPI) were targeting individual ‘pirates’, leading to five-hundred separate US cases in 2004 alone (Cochrane 2011). Douglass Rushkoff suggests the RMI was out of touch, using legal action to “deny the type of experience consumers want on the Internet” (Bylin 2009). However targeting individuals worked to raise awareness of the illegality of file-sharing, opening up a new legal market for digitally distributed music (Ericsson 2011, 1795).

Online Music Stores
The Apple iTunes Music Store (iTMS) was one of the few financial successes for the recorded music industry in the digital age. The billions of songs downloaded since its introduction in 2003 proves that many people are willing to spend money on digital music, albeit at a lower price to that of physical music (Ericsson 2011, 1799). Apple worked with established players in the RMI to establish prices and royalty rates, ensuring users were able to access a huge index of songs from all the major labels (Ericsson 2011, 1799). The user-friendly interface, low prices, consistent audio quality and promise of legality meant the iTMS attracted users not yet entrenched in P2P habits and late-adopters of download technology (Ericsson 2011, 1800). One criticism of the model was the encrypted Digital Right Management (DRM) technology attached to files downloaded from the store, which considerably restricted the ways the music could be used (Sharpe & Arewa 2007). Similar technologies were also used by competitors but have since fallen out of favour in the industry (Sexton 2009, 97). The monopoly Apple has on legal digital music distribution worried members of the RMI as they felt the industry was being dictated on Apple’s terms (Ericsson 2011, 1800). Despite controlling two thirds of all legal digital downloads in 2010, Apple’s position has weakened somewhat as other players such as Amazon, Zune, eMusic and hundreds of smaller companies have entered the market (Tozzi, Leiber & Crise 2011).

BitTorrent and Cyberlockers
Though the ‘Copyright Wars’ turned some towards legal activity, for others the credibility of the copyright industry was weakened, leading to less visible forms of P2P file sharing (Ericsson 2011, 1797). The BitTorrent protocol, allowed users to download fragments of one file from various sources, enabling fast, well protected downloads. Torrent index websites such as The Pirate Bay and Isohunt accounted for almost half of Web traffic at the height of their popularity in 2008, when it was estimated that 95% of all digital music was accessed illegally ( 2010 & Cochrane 2011). Since then the RMI has taken legal action against such sites, most visibly The Pirate Bay. It has proven resilient however, offering its website code for others to use following a court injunction in 2012 (Bilton 2012). The RMI also turned its attention to cyberlocker websites, such as Megaupload, which stores copyrighted material uploaded by users for financial incentives, available for anyone to download (Parloff 2012, 133-135). Despite some success in shutting down torrent indexers and cyberlockers, there is still much illegal activity hidden with virtual private networks in the darknet (Music Ally 2009, 18).

ISP Music Surchage
As the RMI continues to miss profits due to illegal file sharing, there has been proposals for cooperation with Internet Service Providers (ISPs) in establishing a music surcharge for internet services that would effectively ‘monetise piracy’ (Bruno 2008, 24). A move such as this could see the strengthening of traditional players in the RMI as online music stores would have their prices undercut and the threat of music piracy would be inconsequential (Castle & Mitchell 2008, 19; Ericsson 2011, 1810). However as of yet, ISPs have yet to embrace this model despite interest from the RMI. It is true that a surcharge would alleviate secondary liability for piracy from ISPs and the pressure placed on them by copyright industries, but the notion that bandwidth would be freed due a decrease in the use of torrent services would only prove correct if ISPs could provide suitable music services of their own (Castle & Mitchell 2008, 15; Ericsson 2011, 1805). A major criticism of the model is the proposed difficulty in supplying accurate royalty payments to labels, artists, songwriters, producers, publishers and the other entities that are entitled to profits from accessed music (Bruno 2008, 24; Castle & Mitchell 2008, 15). Perhaps due to the ambiguities surrounding aspects of an ISP music model, any such schemes have yet to establish a working foundation. Despite the success of legal online music stores, the illegal file sharing spectre still looms over the RMI. This suggests it may be time for the RMI to look beyond the music download model in order to avoid consumer comparisons with P2P networks.


In recent times streaming music online has become a prominent technology in the recorded music industry. Though services such as Pandora Radio, Rhapsody and were founded in the early 2000s, streaming services in their current form are still in their infancy (Haupt & Shelley 2012, 132). The introduction of the Stockholm-based service Spotify into the US market and its subsequent integration with Facebook in 2011 has led to a surge in the industry (Griffith 2012). Many new companies have since come into existence, while existing brands such as MOG and Rdio now provide a free service much like Spotify, with advertisement-based revenue supplemented by an advertisement-free, paid subscription model (Griffith 2012). As the music available on these services is licensed directly from music labels and artists, and much of the music available is free or low-cost, there is potential for this technology to re-introduce widespread legal online music usage.

Technology and Industry Structure
Music streaming services act under a licensing model rather than one of ownership. There is no permanent storage of transferred data as with download services, but rather the user must have an internet connection to listen to a song (Ericsson 2011, 1791). Streaming services are split into non-interactive or on demand interactive services. Many online music radio stations can be classified as non-interactive as users simply listen passively to a curated playlist (Duncan 2012). Websites such as Pandora or find the middle ground between the two categories, as the user can set parameters for listening. Duncan (2012) calls these limited interactive services. On demand services such as Spotify or Grooveshark allow users to choose any available song to play, with the possibility of creating and sharing playlists (Haupt & Shelley 2012, 134). While the majority of these are web-based, services such as Rdio and Spotify are downloadable applications, which due to their fast play response time, gives them the feel of a computer media player (Haupt & Shelley, 133).

Financial Uncertainty
Free streaming services draw their revenue from advertising. Much of this is web-based display advertising, though Spotify incorporates audio spots in between song plays (Griffith 2012). Paid subscription services also garner revenue, with users offered additional features on top of the free service (Haupt & Shelly 2012, 132). Streaming services are growing in stature and finances. As a market leader, it was reported by the Wall Street Journal that Spotify made $236 million in revenue in 2011, 140% up from their 2010 figure of $99 million (Sisario 2012). However as Spotify gets larger its net losses increase, up to $56.6 million last year (Sisario 2012). A quarter of Spotify’s 10 million users are paid subscribers, yet in 2010 $71 million of the $99 million received in revenue came from subscription fees (Griffith 2012). Griffith (2012) explains that lack of advertising revenue is a problem for all streaming services, as businesses are yet to be converted, instead running expensive advertising campaigns on competing mediums such as broadcast radio. A further problem for streaming services is the cost of music licensing fees. As an on demand service, Spotify must pay fees direct to labels and artists. Though the exact amount is not publicly known, Proffitt (2012) suggests a figure between 70% and 97% of Spotify’s subscription revenue is used on licensing. Licensing costs also affect non-interactive and limited interactive services. The statutory license that covers Pandora in the US sees it paying much higher rate compared to cable and satellite services, whereas broadcast stations pay nothing for their music usage (Proffitt 2012).

Impact on Industry
Aram Sinnreich from media consultancy Radar Research believes “The decade of download-driven business is coming to an end” (Tozzi, Leiber & Crise 2011). Indeed it seems that users are willing to sacrifice ownership of data files for cheap, high quality audio streaming, potentially helped by the integration of such services with mobile technologies (Haupt & Shelley 2012, 136). A report from the Digital Music Index found a correlation between countries with Spotify access and a decline in the use of torrents (Hohnen 2012). However preliminary reports such as this are purely speculative, ignoring other factors such as copyright industry instigated shutdowns of torrent-based services (Hohnen 2012). Nonetheless streaming services are proving popular as an inexpensive, legal medium for listening to music. They may not be able to cater to all types of music users but if streaming services continue to attract consumers, businesses may eventually see the value in advertising with them. This could ease the considerable financial problems faced by the sector.


The Artist

Since the introduction of Napster, there has been much literature devoted to the combative efforts of the RMI in the face of a new era, focusing on emerging digital music distribution models and how consumer behaviour has contributed to these. Less has been written about how the digital age has affected those who create music, the artists. Though the RMI acts on behalf of recording artists, its actions in restoring the status quo could be seen as limiting artistic incentive, just as the behaviour of music consumers has been seen to.

Impact of Piracy
There is no doubting that levels of unpaid music consumption has led to a reduction in music sales, which is of concern to both the RMI and individual artists. Waldfogel (2012, 35) argues that though users download music they would not otherwise buy due to expense, many also download music they would have previously paid for. He explains that without an initial threshold of revenue it becomes harder for new products to be made available (Waldfogel 2012, 36). Without financial incentive the constant flow of new music may be stemmed. One of the designs of copyright is the legal guarantee that an artist can profit from their work (Cochran 2011, 318). In order to increase music sales the RMI utilised the force of copyright law, but in doing so may have decreased creative incentive for some artists.

Remix Culture vs Copyright
The widespread availability of sound production software has led to the participatory culture of remix (Sexton 2009, 95). Recombining and reshaping texts has existed for as long as popular music but now digital technologies allow anyone from music professionals to amateur bedroom artists to produce digital sound collages (Cochran 2011, 321). But according to Ericsson (2011, 1787) the internet has yet to be used to its full potential in the creation of music and distribution. He believes copyright law in the US has been separated from its constitutionally prescribed purpose of “promot[ing] the Progress of Science and useful Arts” (Ericsson 2011, 1784). Cochran (2011, 317) reiterates this point, explaining that despite the higher amounts of access to copyrighted material for the consumer, copyright laws control more content than ever. He believes remix culture has the ability to inspire new forms of music, but explains that many talented practitioners are unable to get their output legally distributed (Cochran 2011, 320). Even music produced for non-commercial use is stymied by stringent copyright law (Cochran 2011, 324).

Streaming Revenue
For those artists who exist in the legitimate realms of music creation, there is hope that streaming services will return financial incentive back to artists. As mentioned previously, streaming services pay licensing fees to whoever owns the music they host, namely music labels. Though disclosure agreements hide the exact amounts paid by streaming services, it is believed that Spotify paid in excess of $100 million to the respective major labels when it entered the US market (Harris 2012). Yet it has been reported that artists are yet to see strong returns as labels are left to distribute the money (Harris 2012). Harris (2012) explains that for a small band it would take 90 streams of one song to earn the royalties returned from one iTMS song download. In 2012 Rdio launched a program that grants $10 to an artist for every new subscriber they attract to the service through social networking (The Music Network, 2012). It is yet to be seen how programs such as this one can help to make streaming services financially worthwhile for recording artists.

Eric Weinberg, president of entertainment at Nielsen, explains “The top 500 releases each year account for a greater share of music sales than ever” (Tozzi, Leiber & Crise 2011). Despite the assertion that only extremely popular musicians can rely on their recorded output to make a living, the digital age has given rise to new opportunities for less popular artists to have their music heard. Websites such as Bandcamp and ReverbNation allow users to distribute music independently, bypassing the traditional RMI (Tozzi, Leiber & Crise 2011). While much of this music may not reach a large number of consumers, online communities, blogs and e-zines ensure some success in niche markets (Sexton 2009).The rising saturation of independent music to be found on the internet demonstrates that artistic incentive is still strong despite the challenges of the digital age.


The unsteady adaptation by the RMI to the digital age suggests the likelihood of a complacency that existed before Napster drew attention to the possibilities of new technologies. Its uneasy relationships with both the music consumer and the artist since this point seem to suggest that the industry is still unwilling to fully let go of its old model. Online music stores and streaming services can help reconcile its problems with these populations, but only if they continue to compromise and adapt to the needs of both. This could restore respect and profits to the RMI and eventually ease the need for overzealous copyright restriction.


Tozzi, J, Leiber, N, & Crise, S 2011, 'The Day After The Music Died', Bloomberg Businessweek, 4255, pp. 59-61.

Griffith, E 2012, 'Streaming Music Has A Problem--It's a Huge Success. (cover story)', Adweek, 53, 1, p. 20.

Hohnen, Mike 2012 (3/10) ‘Torrent Services In Decline In Spotify-Friendly Countries’, Music Feeds, viewed 3 October 2012, <>.

Haupt, J, & Shelley, A 2012, 'Spotify', Notes, 69, 1, pp. 132-138.

Harris, Andrew 2012 (23/5) ‘Spotify and streaming music: a black hole for artists’, Crikey, viewed 4 October, <>

The Music Network 2012 (4/10) ‘Rdio CEO on their new Artist Program’, viewed 4 October 2012, <>.

Duncan Geoff 2012 (14/4) ‘Will a new royalty deal mean more money for labels and musicians?’, Digital Trends, viewed 6 october 2012, <>

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Aug 20 2011 “The Revival of Vinyl: Back to Black” The Economist, viewed 2 October 2012 <>.

Waldfogel, Joel 'Digitization and Copyright: Some Recent Evidence from Music' 2012,Communications Of The ACM, 55, 5, pp. 35-37.

Liebowitz, S.J. file sharing: creative destruction or just plain destruction? Journal of Law and Economics 49, 1 (apr. 2006), pp. 1–28.

Ericsson, S 2011, 'The Recorded Music Industry and the Emergence of Online Music Distribution: Innovation in the Absence of Copyright (Reform)', George Washington Law Review Arguendo, 79, 6, pp. 1783-1813.

Parloff, R 2012, 'MEGAUPLOAD AND THE TWILIGHT OF COPYRIGHT. (cover story)', Fortune, 166, 2, pp. 130-140.

Music Ally , 'TAMING THE TORRENT' 2009, Music Week, 14, p. 18.

Oct 27 2010, ‘LimeWire, Napster, The Pirate Bay: A Brief History of File Sharing’ viewed 29 October 2012<>

Cochrane Greg 7 July 2011 ‘A brief history: Music industry versus file-sharing’ BBC, viewed 29 October 2012 <>.

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