The music industry is facing the development of online peer-to-peer (P2P) networks, direct download services and other forms of digital piracy, while at the same time the format and promotion of pre-recorded music are undergoing major transformations with the advent of MP3 and new forms of collective promotion, particularly through online communities and social networks. This chapter analyzes the main effects of digital distribution on demand and supply in the music sector and draws their implications for copyright policies and new business models. In a related work, Waldfogel (2012a) compares the digital music transition to what happened to travel agencies facing Internet intermediaries such as Expedia or Orbitz. Traditional travel agencies have gradually disappeared, but one can hardly argue that this is a social loss, because Internet intermediaries are more cost efficient and can propose better and customized offers. It is therefore not socially optimal to prevent this digital transition, because new digital distribution channels allow consumers to listen to music in new ways but also because digital music increases the long tail of electronic commerce by increasing the variety of titles available online. While the pre-recorded music industry was the first to experience the challenges of digital distribution, other cultural industries such as the movies and book industries are currently facing the same challenges. In this chapter, I will review how the transition to digital music is affecting both demand and supply.
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