Thursday, February 04, 2010

Bad Economics: Revenue vs. Profit

I was reading The City Paper, one of Nashville's free news magazines, and came across this article on music sales. The following caught my attention:

Now for some basic math, using a revenue formula (for record labels) of 70 cents per digital track and an average of $9.25 per album. The results: 2009 digital track revenue grew about $62.3 million while album sales revenue fell about $503 million. That’s a net revenue loss of more than $440 million.

So clearly digital track sales are not fully replacing lost album sales revenue. In fact, during 2009, digital track increases offset less than 15 percent of the revenue lost from shrinking album purchases.

There are two things that bother me about these paragraphs. The first is the comparison of digital tracks versus album sales, which includes both physical (CD) and digital albums. It's not clear to me why one wouldn't just treat albums as bundles of tracks, rather than different things. In any case, while sellers might not be happy with decreasing album sales, buyers are presumably happier because they don't have to buy as many unwanted songs as they did when albums could not be broken up.

The more serious objection is that the real issue is not revenue but profit. What if digital tracks (and albums) are significantly cheaper than physical albums to produce and distribute? It might not be the case--bandwidth, storage, and management of these files are not free--but then again, it might. If the profit margin on a digital track is high enough, and if the profit margin on physical media is low enough, total profit might still be rising despite the drop in album sales revenue. Yet the word "profit" does not even appear in the article. We simply cannot tell whether the decrease in album sales and increase in digital track sales is, on net, good or bad for sellers, based on the information in this article.

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