Can't stop the music: Industry fails to keep pace with consumer habits

The Supreme Court is expected to rule next month whether Grokster, a Napster-like file-sharing network for downloading music and other digital entertainment, can be held liable for facilitating copyright infringement. But even if the music industry wins the case, two marketing professors at the W. P. Carey School of Business argue that it will ultimately lose if it keeps fighting consumers. Their research suggests that trying to stem music downloads through legal action and technology is likely to cost the industry more business than it preserves.

The Supreme Court is expected to rule next month whether Grokster, a Napster-like file-sharing network for downloading music and other digital entertainment, can be held liable for facilitating copyright infringement.

But even if the music industry wins the case, two marketing professors at the W. P. Carey School of Business argue that it will ultimately lose if it keeps fighting consumers. Their research suggests that trying to stem music downloads through legal action and technology is likely to cost the industry more business than it preserves.

Professor Rajiv Sinha says the study he conducted with Naomi Mandel, another W. P. Carey marketing professor, suggests that many students initially turned to file-sharing not because they were opposed to paying for their music but because they wanted to buy just a song or two of their choice.

The problem, he says, is that the industry still is trying to get people to buy CDs when many music buyers want to own just those one or two songs. "Basically, the way I look at it is, if you go to a grocery store, if you want to buy three bananas and four apples, nobody prevents you from doing that. You can't do that for music," he says.

"If you let consumers download the songs of their choice so that they may customize their own CD, they are willing to pay you," Sinha continues. "The bottom line is record companies need to get with the program, instead of wasting money in court," says Mandel. "They are no longer providing customers with what they want, which is unpackaged, convenient, immediate access to individual songs. Many customers will pay for these songs, but not in the traditional CD format."

Most customers willing to pay

In a study they expect to complete this summer, Mandel says that they are finding three major groups among the undergraduate music fans - one group that will always pay for music, another group that will never pay, and a third group that will pay something, "depending on the situation." The third group is the largest, she says, and represents probably half their survey participants.

Sinha says that his pricing models suggest that while price sensitivity varies significantly across different market segments, the average price consumers are willing to pay is about 90 cents for popular songs from well known artists.

But what about the pirates? Sinha says music companies should not worry so much about the group that won't pay. He says that many of them never bought CDs anyway, and the industry should concentrate instead on finding ways to "convert these pirates into paying customers over time."

Instead of trying to preserve the old model, Mandel says their study suggests that the music companies should concentrate on novelty seekers, the group of music consumers who are most likely to be fearless in downloading - and most likely to buy on impulse. "Our intuition is that legal downloading Web sites would have the best chance of attracting this segment if they make their Web sites more exciting," Mandel said. For example, the sites could feature live concerts, video, downloadable ring tones, or exclusive artists.

Sinha says that the industry has an opportunity to use the technology to develop new ways of attracting consumers, perhaps by producing multiple versions of the same song, recreating the concept of artwork that distinguished many album covers in the past, or by creating the kind of frequent buyer programs that are utilized by airlines and many retailers.

Old model just won't work

What won't work is trying to preserve music's old business model, argue Sinha and Mandel. First, the old preference for buying album-sized lengths of music appears to be changing. Mandel, who is studying the psychology of music consumption as part of this larger study, says that members of Generation Y seem to have less loyalty to particular bands or artists - although part of that may be driven by a perception of a decline in quality.

In addition, Sinha argues that if the industry continues to try to hang onto the old business through legal threats and moral hectoring, it would alienate consumers. "Can you imagine suing your entire future customer base? It's ridiculous, from a marketing standpoint."

Nor should the industry count on help from technology, he says. Citing earlier work on software piracy in collaboration with W. P. Carey information systems professors Raghu Santanam and Ajay Vinze and two doctoral students, Sinha says they found that anti-piracy technology can actually reduce demand if pursued too far.

In the paper, the authors looked at the challenge open-source software - free software created by a collective of volunteers for common use - created for traditional software companies. While Microsoft and other traditional software providers initially saw open-source programs such as the Linux operating system as a challenge to their market share, Sinha, Santanam and Vinze argued that traditional software companies needed to respond very carefully, and demonstrated that pushing piracy controls too far actually lowers the willingness to pay for their products.

The authors surveyed 1,076 graduate and undergraduate business school students on a hypothetical software purchase. In the survey, the students were asked to assume that they were buying a new computer and had to choose whether to use a lower-cost open-source operating system or a more expensive Microsoft operating system.

In one scenario, students who were familiar with OpenOffice were told that Microsoft is typically available for $180. The team found that when given an open-source alternative, willingness to pay for Microsoft Office declined by 12 percent (relative to the stated retail price). However, while a piracy control strategy increased their willingness to pay by 32 percent, when this control strategy was employed in addition to alternative deterrence strategies, the willingness to pay increased by only 5 percent.

"There's a limit to how far you can go with controls," Sinha says. "The willingness to pay for the software drops dramatically when you try to put too many controls in place."

Ultimately, Sinha says, the only solution for the music industry is also a market-based solution. "You have to defend your assets of course, there's no question about that, but the only way to do it is through market-based solutions and to do it before you're overwhelmed by your competitors," he says.