While advancements in technology helped achieve great strides in adding to the cultural and social value of human development, it created challenges on other frontiers. In particular, technology advancements instigated the displacement of CDs. The obsolescing of CDs demonstrates challenges arising from technological advancements, such as the preservation of intellectual property rights and translating new opportunities from such developments. While the displacement of CDs has posed challenges to certain industries, it is demonstrative of a natural progression and provides a cushion of positive development on social and economic grounds.
The discovery of digital media storage via shared networks introduced time and cost efficiency in content distribution but also initiated a process of cycling effect that triggered a displacement effect of CDs. It was found by Oberholzer‐Gee and Koleman that up until 2006 there were about 10 million simultaneous users on the major peer‐to‐peer (P2P) networks exchanging over 300 million files each month (2). Many of these file-sharing networks allowed users to download media content for free. In consequence, between the years 2000 to 2005, the number of compact disc sales fell by 25 percent to 705 million units (Oberholzer‐Gee & Koleman 2). This dip in compact disc sales is clearly justified by the entry of free internet file-sharing. Free internet file-sharing offered the market an alternative form to CDs into the greater economic ecosystem of digital content consumption.
However, this trend of free, downloadable media content raised many concerns. As producers of CDs and media content came to realize, free internet file-sharing led to revenue declines. It has been documented that the introduction of free digital file-transferring and storage has eroded the profitability of selling recorded music via CDs, which created loss to recording suppliers and firms (Rob & Waldfogel 3). Further research from Peitz and Waelbroeck showed that the implied loss of CD sales due to MP3 downloads is 11% worldwide, and 12% in the United States between 2000 and 2001 (10). The proliferation of free redistribution of music through illegitimate distribution sources forced CDs into becoming an obsolete form of good.
With the competition from file-sharing networks against CDs, a definitive positive effect arose for the public’s welfare. Following normative market models, an increase in the supply of music with free distribution would lead to a lower price for such music. As file-sharing networks become available and abundant, then the supply of redistribution channels of digital media would increase. As indicated, many of these digital contents free of charge, in contrast to the amount that a normal CD would cost. As such, the available supply of music would then compete against existing mediums of music products, such as CD albums. Leading to an increase in supply indicates that more quantities of goods would be provided for the given price level. This would increase in supply, where in a market model, effectively pushes the supply curve to the right, lowering the equilibrium point where supply and demand meet. Hence, the up-sloping of the supply curve would indicate that more suppliers are willing to provide the same good for a lower price. This would drive the price down to another equilibrium level, as demanded by the market.
The substitution effect of free file-sharing networks over CDs as media transfer medium led to lowered demands and subsequent cost of CDs. Since consumers would pay zero for the same product in contrast to paying the full price in consuming the same type of media via CD, consumers no longer demanded more CDs as a preferable method of music consumption. The law of diminishing marginal utility would play against the backdrop in the consumption of CDs for media content. As increased availability and consumption of media content is delivered through competitive products such as free file-sharing networks, consumer satisfaction decreases due to the abundance in such media contents. The end result is a lowered demand for CDs as a preferred method in consuming media content. A demand curve modeling this market phenomenon for the demand for CDs shows that the price will be justifiably lower. CDs had once occupied a higher demand position, but are now going into a lower demand position due to an increased supply and lowered demand. On the demand curve, the demand would be lower on both the y-axis, indicating price, and as well as the x-axis, demonstrating the demand. The result is ultimately creating the effect of pushing the product demand of CDs down into a lower price range. This effect shifts the demand curve to the left, from a higher demand into a lower demand position. The shift in the demand curve would then lower the price on existing CDs, due to the lack of demand. Therefore, there would be a lowered demand position for CDs cause a drop in price of CDs. As testament to the demand curve, in October of 2003, Universal reduced its list price of albums by 30 percent in order to attract sells more quantities of such goods as proof of confirming the market models (Rob & Waldfogel 5). The lowering of demand and the constant supply of CDs shifted the demand curve to the left, where it now intersects with the supply curve, hence lowering the effective price of this good.
The music industry fought to protect against losing CD revenue by way of suing individual downloaders of free music. However, the effects of the lawsuits proved that the market no longer had an appetite for such media consumptions. Laws such as the Digital Millennium Copyright Act and the Uniform Computer Information Transaction Act were passed in order to address the concern that “redistribution technology may threaten markets for information goods by making it difficult for producers to capture the returns of their investments” (Mortimer, Nosko & Sorenson 3). File sharing not only allowed for a type of “large-scale internet piracy, ” but it also affected the landscape of media consumption. File sharing forced suppliers into re-evaluating CD as a medium for generating revenue in media output (Peitz & Waelbroeck 6). In response to the eventual cycling effect, the music industry changed its strategy and began offering music online. When Apple Computer made its MP3s available by launching iTunes music site in 2002, suppliers quickly followed suit and began offering music at a nominally cheaper price of 99 cents per song on iTunes (Rob & Waldfogel 7). The results were measurably better. The market reacted well and welcomed this change by increasing sales at a significant amount- with 50 million downloaded songs from iTunes up to March of 2004 (Rob & Waldfogel 7).
While sales on album labels have suffered a direct impact, this new phenomenon of free music downloads created many opportunities. Music suppliers were able to use free music downloads as a ripple effect for aggrandizing reach to individual music consumers. By increasing sampling of music being offered to more clients, more exposure to such music becomes available and consumed. The music industry has been shown to benefit from sampling or exposure effects. As shown by Peitz and Waelbroeck, the suppliers of music have tapped into the file-sharing distribution as a mechanism to save costs on marketing and promotions (3). By boosting awareness of such music through greater dispersal and distribution channels, producers save on promotional and marketing costs. The supplier of music can then focus on the sale of complementary, non-digital goods to recover investment, one such as concerts. As evidenced by Mortimer, Nosko and Sorenson’s finding, increase in demand and supply for concert tours were associated with the introduction of free file-sharing activities (4). As postulated by normative market models, an increase in demand for concerts would create more profits for the suppliers. The increase in demand would shift the demand curve to the left, where a higher price can be obtained for a given quantity of concerts. This would allow the equilibrium price level to be higher. Due to such demands, suppliers can charge more for concerts due to the increased supply, bringing more profit to the suppliers of concerts. Further evidence from Mortimer, Nosko, and Sorenson suggest that average ticket prices for concert tours have also gone up due to the increase in demand for such performances – making it a lucrative alternative to selling recorded albums.
Though CD sales are still existent, it is decreasing rapidly. Sales in 2013 were documented at 4.68 million albums (Christman, "U.S. Album Sales Hit Historic Lows"). It is inevitable that such changes are here to stay and evolve throughout time. Market and industry suppliers, while met with significant difficulties, in the beginning, adjusted to such changes and came out better, stronger, and more innovative in exchange. As proven by evidence, advancement in technology will push industries to become more effective and innovative, examining traditional and venturing into new terrains for methods of conducting business.
“Compact Disc Hits 25th Birthday." BBC News. BBC, 17 Aug. 2007. Web. 18 Oct. 2013.
Christman, Ed. "U.S. Album Sales Hit Historic Lows." Billboard. 2 Aug. 2013. Web. 23 Oct. 2013.
Mortimer, Julie H., Nosko, Chris, & Sorensen, Alan. "Supply Responses to Digital Distribution: Recorded Music and Live Performances.” Information Economics and Policy. Volume 24, Issue 1, March 2012, Pages 3-14, ISSN 0167-6245. Mar. 2012. Web. 18 Oct. 2013.
Oberholzer-Gee, Felix & Koleman, Strumpf. "The Effect of File Sharing on Record Sales: An Empirical Analysis." JSTOR. The University of Chicago Press, 22 Dec. 2010. Web. 18 Oct. 2013.
Rob, Rafael & Waldfogel, Joel. “Piracy on the High C’s: Music Downloading, Sales Displacement, And Social Welfare in a Sample of College Students.” National Bureau of Economics Research. October 2004. Web. 18 Oct. 2013
Peitz, Martin & Waelbroeck, Patrick. “The effect of Internet Piracy on CD Sales: Cross-Section Evidence.” CESINFO Working Paper No.1122. January 2004. Web. 18 Oct. 2013.
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