For more than a decade the music industry has claimed that digital piracy is the main cause for the gradual decline in revenues. However, looking at the sales data of the music industry itself shows that the disappointing income might be better explained by a third factor that is systematically ignored.

After music cassettes were introduced in the mid-70s the number of sales saw a gradual increase, until the late 80s when the CD took over in popularity. Cassettes were eventually phased out as CD sales continued to skyrocket. In music industry vocabulary one could argue that CDs killed cassettes.

Interestingly enough, this format shift was nothing new for the music industry. The exact same pattern also applied to the LP/cassette battle, with cassettes eventually taking over from LPs in the early 80s. Now, three decades after cassettes started to dominate the music business, the CD is losing ground.

This time around there is a new enemy in town, digital piracy. For nearly a decade the U.S. music industry has seen a decline in sales of physical CDs and all this time it has put the blame on digital piracy. By doing so, the labels conveniently ignore the most drastic format shift music has ever seen – the digital revolution.

With the growing popularity of the Internet, computers and most importantly MP3-players, music fans have started to trade in their CDs for MP3s and other digital files. Initially, the public had to convert CDs themselves, but in 2003 the iTunes store opened, selling over a million tracks in the first week.

With this shift from physical to digital, another important change hit the industry, one that may in part explain why the labels’ revenues in the U.S. continued to decline. With the introduction of paid downloads, consumers no longer had to buy a full album if they were only interested in two or three songs. This new freedom for consumers has dramatically changed the music sales landscape.

According to statistics taken from the RIAA shipment database, between 2004 and 2008 the number of single tracks sold in the U.S. increased by 669 percent while the number of album sales dropped 42 percent. Consequently, the income of the big labels suffered since single track sales are less profitable than full albums. As can be seen in the chart below, the number of music ‘units’ sold continues to grow rapidly nonetheless.

Music ‘units’ shipped in the United States

So where does piracy fit into this picture? Truth is, we just don’t know.

File-sharing is obviously a by-product of the digital revolution in music, but its effect on revenues has been much overstated. In every annual report that comes out, the music industry blames piracy for its troubles, even though digital sales are booming and even though these are directly competing with piracy.

We believe that the format shift from physical to digital music, and the change in buying habits that came along with it, may explain the decline in revenue more than piracy can. To back this up we’ve compared the labels’ revenues in two countries on opposite ends of the digital / physical rift, the U.S. and Germany.

Although piracy is rampant in both of these countries, the local music consumption habits are very different according to data published by IFPI. In Germany physical CDs are still very popular, with digital sales representing less than 25% of all music ‘units’ sold. In the U.S. on the other hand, digital outsells physical with 70% of all sales.

If the theory that the shift towards digital music is negatively impacting revenues holds up, then the German record labels should do much better. Indeed, between 2004 and 2008 the net revenue (in dollars) of the U.S record companies fell more than 30%, compared to less than 5% in Germany.

If the data above is not convincing enough, there is also another unexplained anomaly in the sales data.

If digital piracy is such a problem one would expect that it will mostly hurt digital sales, but these are booming instead. Many younger people don’t even own a CD-player anymore, yet the music industry sees digital piracy as the main reason for the decline in physical sales. Strange, because digital piracy would be most likely to cannibalize digital sales. This anomaly also refutes the excuse that the U.S industry could be hit more by piracy than the German.

So what does the music industry have to say about this all? TorrentFreak asked the RIAA to comment on our findings and they released the following statement.

“We’ve always said there are multiple reasons for the decline of the industry during the past ten years: Competition for the entertainment dollar. Diversification of music consumption and access. But we also think people being able to steal music online is the primary reason. Not the only, but the primary.”

We obviously have to differ with the RIAA here. The digital revolution in music has changed the entire industry by altering the consumption habits of music fans. Although piracy could also be a factor, the data we’ve seen thus far suggests that it plays only a minor role, if it has any effect at all.