The relentless drumbeat from the music and movie industries for the last ten years can be summarized thusly: “Help! Illegal downloads are killing us. We need Big Brother to squash our customers for us!”

Wrong!! There are two things killing (at least) the music industry. The first is the rise of legal downloads. The profit margins for the labels on a $ .99 song at Apple or Amazon are literally pennies as opposed to the old system of several dollars per CD purchased. So, even though more actual music purchase transactions are being rung up in vrtual cash registers the world over, it literally takes hundreds of the new transactions to equal even one physical CD purchase as far as the record labels are concerned. Hence, falling revenues and profits.

The second problem is one that has not been discussed much at all as far as I can tell. If in the aggregate, the consuming public has about as much disposable income today as in 1999 (which is the dawn of the Napster Era), then total music sales should have stayed the same, albeit in higher volumes of $ .99 each. But total music sales have been falling. Hence, “Piracy is killing the music industry.”

But a new study by the Guardian in the UK posits a different theory: downloading isn’t killing the music industry, the gaming industry is.

If we assume that there’s roughly the same amount of discretionary spending available (which, even allowing for the credit bubble, should be roughly true; most of the credit went into houses), then it’s clear who the culprit is: the games industry. By 2009, the amount spent in games and music is almost exactly the same as 1999 (though note that the music industry changed its methods from 2004).

Yes, downloaders aren’t spending money on the music industry, and in that way they are hurting it. But I’d argue that the true volume of “lost” sales is nowhere near the claims made. Assume that music couldn’t be copied (as many games can’t). I don’t think that the volume of music sales would equate to all those downloads. At best, it would be £600m larger.

But the reality is that nowadays, one can choose between a game costing £40 that will last weeks, or a £10 CD with two great tracks and eight dud ones. I think a lot of people are choosing the game – and downloading the two tracks. That’s real discretion in spending. It’s hurting the music industry, sure. But let’s not cloud the argument with false claims about downloads.

Have a good weekend.