The disease of free
The battle for paying digital customers may have been lost before it had truly begun. In 1999, Napster, a free online file-sharing service, made its debut. Not only did Napster help change the way most people got music, it also lowered the price point from $14 for a CD to free.
"It's pretty easy to give away something for free," said Russell Frackman, the lead attorney for the music industry in its 1999 case against Napster. "It's not that the music industry thought the technology was bad, it just objected to the use to which it was being put."
Apple's (AAPL, Fortune 500) iTunes is credited with finally getting people to pay for digital music, but it wasn't unveiled until 2003.
In the time between Napster's shuttering and iTunes' debut, many of Napster's 60 million users found other online file sharing techniques to get music for free. Even after iTunes got people buying music tracks for just 99 cents, it wasn't as attractive as free.
"That four-year lag is where the music industry lost the battle," said Sonal Gandhi, music analyst with Forrester Research. "They lost an opportunity to take consumers' new behavior and really monetize it in a way that nipped the free music expectation in the bud."
Now just 44% of U.S. Internet users and 64% of Americans who buy digital music think that that music is worth paying for, according to Forrester. The volume of unauthorized downloads continues to represent about 90% of the market, according to online download tracker BigChampagne Media Measurement.
"People will steal music regardless, so it's not worth trying to fight against something where the fight's already over," said Dan Ingala, founder and lead singer of the band Plushgun.
When Plushgun released its album "Pins and Panzers," it was the most downloaded album on the popular peer-to-peer Web site What.cd with more than 10,000 illegally downloaded tracks.
"It's just a matter of adjusting," said Ingala. "At the same time, it's helping us create an audience."