ReadWriteWeb‘s Audrey Watters, on news that the music industry has lost a third of its value over past 7 years, says:

It’s a familiar refrain from the music industry: revenue is down and piracy is to blame. That’s the gist of the the International Federation of the Phonographic Industry’s (IFPI) annual Digial Music Report, which points to a slowdown in the growth of digital music sales.

It’s piracy, not licensing, that the IFPI cites as the major obstacle to a thriving music industry, citing job losses and “victimized” developing artists. Addressing this, according to the report, is the government’s responsibility, and it argues that as such it can “turn the tide against piracy in 2011.”

But I say there’s a longer-standing, more potent reason the music industry is in tatters.

Back in its hey-day, music companies gave music to radio stations around the world, in the form of albums and singles. In return, radio stations promoted the label’s artists and created buzz for them. The radio industry could ‘chart’ a new act to national fame and fortune in weeks. Every successful artist earned millions for the music labels. This is how the Beatles, the Rolling Stones, Abba and Stevie Wonder were made.

But the music industry got greedy. They decided to start charging radio stations for the right to play their music. In doing so, they forced the radio industry to adopt two new strategies that would ultimately damage the entire music value chain:

1. Radio stations pared back their playlists to a small range of cheaper ‘back catalogue’ songs. Stations became ‘golden oldies’, ‘hits of the eighties’ or ‘classic rock’. No new acts were broken, because no new tracks were licensed. The music labels had effectively begun starving their own pipeline.
2. The stations increased the ratio of Advertisements & Talk Vs Music in a two-pronged approach: to reduce the number of tracks they played (thereby reducing royalty payments); and increase ad revenue in order to afford the royalty fees on those tracks they did play. Audience numbers suffered, as listeners grew frustrated at the lack of music played. At around this time Apple released the iPod, delivering a completely ad-free music experience to consumers.

Without radio stations curating or commercialising acts, discovery of new artists is incredibly difficult for the average consumer. iTunes and Amazon endlessly rehash Justin Timberlake, Kanye West and Shakira because they simply don’t have the means attract attention to new acts. They can only sell the artists who have already generated buzz elsewhere.

The music industry will continue to blame piracy for their declining sales, but the reality is that they started suffocating themselves years ago by closing off their most effective avenue to market.