Cost Savings

It is difficult to determine with precision the magnitude of the potential cost savings associated with digital distribution, but the following, slightly different sketches of the distribution of revenues under the current system all suggest that the gains would be large.

• Neil Strauss reports that ""Currently, when a CD is sold [in the United States], 35 percent of the retail price goes to the store, 27 percent to the record company, 16 percent to the artist, 13 percent to the manufacturer and 9 percent to the distributor." See Strauss, "Pennies That Add Up to $16.98: Why CD's Cost So Much," New York Times, July 5, 1995, Section C, page 11, column 1.
• In Great Britain, a typical popular-music compact disc costs aprx. $17 (U.S.).  Of that amount, 17% goes to the retail store, 50% goes to record company, 17% goes to taxes, and 17% goes to a combination of the composer, the music publisher, and the recording artist.  New recording artists typically get only 7% of retail price, while established artists get as much as 15%.  However, both are commonly responsible for studio charges and other expenses.  The net result, under current regime, is that new artists often end up with nothing.
• Beau Brashares provides a (former) insider's account of how musicians fare under this system.
• Randy Barrett provides a grim view of the profits currently being made by the record companies.

Distribution of music over the Internet plainly would enable us to eliminate the shares of the pie currently going to the CD manufacturers, the distributors, and the retail stores -- in the United States, totalling 57% of the cost. For the time being, at least, Internet distribution also saves money on taxes. Whether the share that currently goes to the record companies could also be eliminated is a more complex question. The "big five" record companies currently perform many roles, including identifying promising artists, helping them "develop" their music, and promoting their recordings. Many observers think that the record companies overcharge for these services. The Internet has already fostered many new intermediaries that perform -- typically for substantially reduced fees -- one or more of these functions. As competition from the new entrants to this market intensifies, we can expect to see the fees charged by the record companies to decline. How far is difficult to say.