Warner's Dillema

In early February, Warner Music CEO Edgar Bronfman Jr. announced that his company would not be issuing licenses to free (non subscription based) interactive music streaming services. Bronfman has arguably been the most outspoken of the major label CEO’s when discussing the life of music as it collides with new technologies and the internet. While Bronfman’s sound-bites are entertaining, one must ask whether they make good business judgment.
BBC News quoted Bronfman as saying ”free streaming services are clearly not net positive for the industry and as far as Warner Music is concerned will not be licensed. The get all your music you want for free, and then maybe with a few bells and whistles we can move you to the premium price strategy is not the kind of approach to business that we will be supporting in the future.” Warner is singling out those services such as Lala, Grooveshark or Europe’s Spotify, which allow users to select specific songs and entire albums to stream on demand without paying a fee. It is the position of Bronfman, and many other recording industry executives that such legal services have the potential to permanently displace the sale of music.
Fear that record sales will continue to decline as the use of free on demand streaming services rise is rational. This fear was directly addressed by Congress more than ten years ago when they provide sound recording copyright owners with an exclusive right to digital public performance of music. Through this right, Warner collects a royalty each time music they own is played by a licensed webcaster or streaming service over the internet. In contrast, Warner does not collect money when their music is played over traditional radio airwaves. The royalty compensation provides a steady stream of income to copyright owners, while providing consumers a way to remain connected to music and to try music in advance of purchasing it. Furthermore, it is unlikely that streaming will completely replace music purchases because consumers do not have constant access to internet streaming.
According to NDP Group, a researcher of trends in the music industry conducted a study analyzing the use of internet music among the key teenage demographic of 13-17 year olds. Teenagers purchased 19% less music in 2008 when compared to 2007. At the same time, the demographic also acquired less music through illegal means during this period. Use of Peer to Peer networks declined by 6% and the “ripping” of music from friends dropped by 28%. One area of music consumption that dramatically increased was the use of internet radio and streaming services. 52% of teenagers listened to online radio in 2008, compared to only 34% a year earlier.
Trends clearly show that the legal consumption of music over the internet is increasing, while illegal means of music acquisition is declining. The rational consumer will always seek to acquire product at the lowest economic cost. Although the theft of music via peer to peer networks has been stigmatized enough to decrease the practice among consumers, the practice of acquiring music for free remains in high demand. The copyright code has been adjusted to provide royalty payments and therefore incentivize record companies to participate with and encourage new technologies such as streaming. If it chooses not to allow consumers to acquire music through the most economically efficient legal means, Warner runs a significant risk of alienating consumers. Alienation may result in a return to illegal acquisition of music, or simply moving consumers away from the consumption of musical recordings owned by Warner. The remaining big three record labels are unlikely to follow Warner’s example, and this increases the potential self-inflicted wound Warner is chasing.