Ebay and the Music Business

I've read a lot of hubub about the music industry and how the RIAA has accused the internet and filesharing programs in particular (such as late lamented Napster and Grokster, and the now popular Bittorrent sites) of costing the industry $300 million dollars a year. And, no doubt, illegal file-sharing has affected record sales by providing a free method to download music. But is that all? This is a big question, so surely there must be more to it than dirt-poor college kids ripping Usher tracks in their dorm rooms.

I haven't done a lot of research on the subject (that's why I'm a blogger, for God's sake), but I do know that Ebay currently has over 76,000 active listing for used CDs. Considering that there are hundreds of Ebay stores that specialize in used CDs and that many stores have 10 to 20 times more store inventory than they do active listings, it's likely that there are over one million used CDs available right now.

This is a massive, and fairly efficient, secondary market. Ebay has two main characteristics that economists love to see: transparency and low search costs. Search costs are low because it isn't difficult or time-consuming to type several keywords, hit enter and sort through the list of results. Ebay is also fairly transparent; it's easy to sort through listings and compare pricing, shipping costs and even customer service ratings. This is a markedly different environment from that which was present just a decade ago.

Before the advent of the internet, consumers interested in music had only a few options, such as thrift or used music stores, garage sales or buying new CDs from a bricks-and-mortar retailer. The first two options are not efficient. Search costs can be quite high, especially if you have a specific CD in mind. Even a 100-family garage sale (if such things exist) is extremely unlikely to have Bjork's Debut. Even used-CD stores frequently lack selection in rare or alternative tracks - the hundred copies of Aerosmith's "Pump" are not terribly useful if you're more into middling-popular Scandavian pop stars. So to find what you're looking for you end up walking an awful lot of miles.

In addition, rummage sales or used-music stores are not transparent; that is, it's hard to tell if you could find a cheaper Bjork at Joe's Music Store, Play-It-Again or that garage sale on 5th & Vine. ("And if you can find a cheaper Bjork somewhere else, buy it!)

So, before internet commerce titans arose to bestride the land you're only consistent option was to go to a music store and find (or have them order) what you're looking for and buy it...new.

Obviously, the game has changed. Right now in less than a minute, I have found 50 different copies of Debut, with a variety of sales options, starting prices, shipping options and fees and reputations (via feedback rating). My search costs were low; after all I only invested a minute of my life. But transparency is relatively good - I can compare many different stores to find the combination of attributes that best meets my needs. But enough about Bjork, let's get a little more macro.

Generally, active listings last for seven days. With a weekly turnover, that results in 3.9 million listings over a years time. (Granted, many of these auctions will be relisted CDs but many other will sell in shorter timeframes or via 'Buy It Now' to compensate. I'm assuming it's a wash, for these purposes.)

But don't forget about the store inventory listings! Store listings are a little different from active auctions because they last for 30 days and aren't as well advertised so they turn over much more slowly. Assuming an average turn of once per quarter, that's 6,000,000 listings over a year's time.

And this is only one website! Granted Ebay is currently the largest such retailer in the world, but it is far from the only one. Amazon and Yahoo also host many used-product sellers and there are hundreds of independants with a web presence. This is a large, vibrant alternative to new music sales and many consumers are surely taking advantage of it to save money by purchasing their CDs pre-owned.

How big is the scale of the problem? Well, in 2002, the US music industry sold 800,000,000 units, so the internet is crippling CD sales yet. And not all of the used music sold through the internet would have converted into new music sales sans web retailers. Folks who want the hottest releases, or simply prefer to own new things, will continue to purchase new music.

Even so, the millions of used CDs sold online have surely impacted the recording industry's bottom line. Anything that better allows the consumer to recycle their possessions would reduce the number of new items bought, after all. How big of an impact has it made? One percent? Two?

Who knows! I'm just a piker with a few facts and a lot of wild ideas. However, I do think that the dilemma of the recording (and publishing... and film...) industry is a lot more complicated than it appears on the surface.