The Digital Skeptic: Here's All the Music Money Lost to the Web

EN ROUTE TO VENICE, Italy ( TheStreet) -- When Liz Kennedy called to tell me I could touch every music industry sale for the past 40 years, I had no idea it would feel this sad.

It's not her fault. Kennedy is the very professional director of communications for Washington, D.C.-based Recording Industry Association of America. She is the gatekeeper -- among her other duties -- of the so-called Industry Shipment Statistics database.

Here, since 1973, the RIAA has kept a running tab of how much music giants such as the Warner Music Group, Sony Music Entertainment or Universal Music Group sold in any recorded format: CDs, vinyl disks, download singles, cassettes, 8-track tapes -- if it made music and somebody paid for it, the yearly totals go here.

"We are very proud of the depth and transparency of this database," Kennedy told me. "It's a fantastic resource for anybody looking at the scope of our business."

Kennedy was granting me run of the place: I could model, sample and tinker with the numbers, as long as I gave the association credit. But now, taxiing for takeoff flying to the once-and-future monument of decay -- Venice, Italy -- all I can say is, it's stunning how sad a song these numbers sing.

Musicians really are innovators
The single greatest takeaway of wandering through four decades of music sales and revenue data is how this industry reinvents itself in the face of technological change. Heavens, there were lame ideas: the CD single, music kiosk or DVD audio? Please. And money was lost. Roughly $400 million went away when the vinyl single business went south in the late '70s.

It took until the early '80s for the cassette to replace those sales.

But overall, time and again, the music industry faced a new tech world order, embraced it, found an audience with it and made money. It all culminated with a remarkable 1999 peak of 1.3 billion total units sold, earning North American revenues of $19 billion or so.

Then the digital Terminator dropped from the sky, and the music biz became just another John Connor huddling in the wreckage trying to stay alive.

Worse than the fall of Rome
Without question, the impact stunned the industry. Music on the Web was essentially an unserved market through early in the millennium, as unit volumes and revenues collapsed to about $15 billion in 2003. Eventually the industry rallied and found ways to sell songs, including downloads, streaming music services, mobile and sound-exchange distributors -- products consumers gobbled up at unheard-of rates.

Unit volumes soared: The RIAA estimates that online download single services moved north of 1 billion units in 2008. Mobile kicked in another 500 million. It all looked like a digital content house party, save for the fact that revenues plummeted.

Year in and year out, more was sold. But less was made, leading to an incomprehensibly small $7 or so billion total market last year, adjusted for inflation. Even more incredibly, that roughly 60% collapse in sales does not capture the full damage of the digital age.

Stolen music became a major problem.

Shrinkage in the digital content era is a never-ending debate. But the figures I like -- and the ones that are probably the most cited -- are Port Washington, N.Y.-based NPD Group's estimates that about 60% of all music is sampled illegally in the modern era.

When I baked a round estimate of these stolen units into the RIAA model, consumption jumped to a remarkable 3 billion total units. That's triple the size of all CD sales at their height. Assuming consumption patterns stayed where they were 15 years ago -- that is, each music user spent about $45 a year on three or four CDs - the music business should easily be in the low $50 billion range and probably closer to $60 billion.

Or roughly how big Web giants such as Amazon ( AMZN) or Google ( GOOG) are.

That makes a $7 billion music market we struggle through today nearly 85% smaller than it should be. Not only is that an inexorable retrenchment in market size for which I struggle to find corollaries; value vaporizing on this scale is so large that a meaningful recovery is out of reach for this generation.

That also makes the future of the music industry about finding the itty-bitty winners in the tiny sliver of business that remains. Sitting here, getting ready to fly into the rising sun, I am starting to see what the digital revolution has really cost us.

It might be just be more than all the gold in Rome.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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