The music industry is facing an interesting conundrum. Vinyl records are slowly making a comeback and purchases are on the rise as CD and digital sales are concomitantly falling.

Vinyl sales, while both still a fraction of their historic high in the 70s-80s and dwarfed by CD and iTunes digital music purchases grew from near-zero levels in 2004 to a comparatively staggering 1,902,000 sales in 2014.

Vinyl sales are projected to increase in the coming years as some market commentators predict the “death” of CDs and digital music purchases.

While the diminishing sales of CDs and digital music purchases may be slightly over exaggerated and the switch to vinyl records can be chalked up to cultural changes in personal taste, innovation in the music industry to combat music piracy is not hyperbole.

Music piracy was virtually unheard of before the invention of the MP3 file format.201601-Dodd-Frank-(3)

MP3s, which significantly changed the music industry by breaking up album songs into purchasable singles, ushered in the age of music piracy because of the nature of the technology.

Politicians were lobbied hard by organizations such as the Recording Industry Association of America, the plaintiff for most lawsuits against music piracy in the United States, to introduce stricter laws over copyright infringement.

Potential legislation to curb music piracy through broadening criminal law concerning copyright violation, such as the Stop Online Piracy Act (SOPA), was vehemently opposed by prominent organizations like Google, Facebook, Twitter, Reddit and Wikipedia.

A Backlash from these organizations and constituents caused the bill to be shelved in July 2011.

Six months after the defeat of SOPA, Spotify launched its U.S. service in January 2012. Spotify, a Swedish music streaming company, has been profitable because it offers the dual services of Spotify Free, where customers can listen to virtually any piece of music for free but have to listen to advertisements, and Spotify Premium, where subscribers pay for the benefit of no commercials.

Spotify’s success is a curious outlier because companies that have shared “free” music in the past, such as Napster, LimeWire and Kazaa, have been decimated by high-profile copyright infringement lawsuits.

Spotify is legally not a music pirate because the artists are compensated (albeit at a historically smaller rate compared to vinyl times) through advertising and premium subscription revenues.

Music piracy is on the decline because of innovations in the music industry such as Spotify in lieu of formal legislation aimed at addressing the crisis.

Financial institutions have faced a crisis more tangible than the music industry’s, namely the 2007-2008 global financial crisis.
If the invention of MP3s was the driving force behind calls for legislation to combat the music industry crisis, loose regulation of synthetic investments and subsequent loose lending policies were cited as the trigger for the financial crisis.

The goal of the Dodd-Frank Act, passed in 2010, was to better regulate financial markets in the hope that a similar financial crisis could be avoided in the future.

Similar to SOPA, the Dodd-Frank Act has not been without its share of controversy and criticism.

Complying with the regulations set forth in the behemoth 848 page Act has been a burdensome and costly activity for most financial firms.

Smaller community banks are feeling the burden most – already struggling since the early 1980s – as they lack the resources and capital for digesting the mountains of compliance tasks and obligations.

Detractors say the Volcker Rule, which limits bank ownership of hedge funds and the amount of speculative assets they engage in, is counterproductively creating more inefficiency in the market and fueling more shadow banking.

More information on derivative markets has become available but it is still unclear how useful the information actually is.

The effects of the Dodd-Frank Act may be too early to tell but what is apparent is that there has been pushback from advisors and other participants within the financial industry over the new legislation.

The crisis of 2008 taught policy makers that the financial sector clearly needed better regulation.

But does the Dodd-Frank act solve that problem? If the detractors are right, Dodd-Frank is a worthwhile but ultimately meager attempt at resolving a problem that still exists in the financial sector.

Market innovation to combat the crisis, previously seen in the music industry, may be a solution for financial markets.

Although, while vinyl may be making a return in the music industry, the future in the investment arena is more likely to be driven by tech innovation, through developments such as robo-advice and smart beta, rather than a return of things past such as insurance salesmen going door-to-door and selling commission laden products to unsuspecting families!


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