Is iTunes Killing the Music Industry? The Effect of Unbundled Track Sales on Music Industry Profits

Motivation and Research Question The plight of the record industry is well known – sales of recorded music have fallen steadily since 2000 as the growth of digital sales has not been fast enough to compensate for the decline of physical cd sales. For example, in 2007 alone physical sales fell 13% to $15.9 billion while digital sales grew by 34% to just $2.9 billion, leading to an overall 8% decline in total global sales dollars. (New York Times 2008) While some of this decline may be explained by piracy (Liebowitz 2008, Robb and Waldfogel 2006) or perhaps a declining interest in music ownership, many industry experts and media sources cite album unbundling in digital stores as a major contributor to the decline in music revenues. (Wall Street Journal 2008, Elberse 2009). Specifically, the argument is that consumers who traditionally purchased CD albums when that was all that was available 1 have switched to cherrypicking only their favorite tracks digitally now that albums have been unbundled on stores like iTunes. By way of example, Nielsen Soundscan reports that combined digital and physical album sales dropped 15% in 2007 from the prior year while digital track sales grew 45% in the same year. (Nielson 2007) Since digital albums are often sold at around 10 times the price of a digital track and physical albums are sold at 14-15 times the price of a digital track, it is no surprise that some labels and managers blame the shift toward digital tracks for lost industry revenues.