The music market

Matt Yglesias gets the key fact about recorded music. It’s a non-rival good:  when I play an mp3 file of a song, there’s no less of it for you, so the marginal cost of my consumption is zero.  He also gets the profoundly illuminating and useful principle that everything should be sold at marginal cost.  From this, and I note that it’s a short post and he doesn’t undertake to get much into the weeds, he tries to turn down the alarm volume over the 50% decline in recorded music sales (correctly distinguishing it from listening) since 2001.

However, he slips in this reassurance

Thanks to copyright, a recordings-seller does have some level of market power to allow him to seek monopoly rents. But there’s a pretty high degree of substitutability between different songs, so the competition is still pretty intense and the prices are low.

which is completely wrong in two ways. First, recorded content is not only non-rival but has now become non-excludable.  Copyright is only useful if the fixed or variable costs of infringing are high, the former so infringers are few enough to enforce against (for example, people with a printing press and a distribution system for physical books), and the latter so an infringer can’t make lots and lots of very cheap usable copies.  This is no longer the case as music has become digital (hence copyable perfectly and quickly without limit, unlike, for example, a book with a copying machine or music on tape cassettes) and the ‘printing press’ is any computer.  As long as I can copy my favorite song and email it to my friend, RIAA ‘s hands are completely tied; no jury will award tens of thousands of dollars of damages for copying a few songs pour décourager les autres. DRM software can control copying in theory, but when I went looking for a way to read my Kindle books on my Sony Reader, it took about ten minutes of Google search to find at least two free apps that will unlock them. Second, see “marginal cost pricing” above: a dollar for a tune is too high by, um, about a dollar, or an infinite percentage.

Yglesias’ recommendation for music creators in the current world is

The optimal strategy for a popular band that wants to do something nice is market pricing for concert tickets, plus free recordings. Or even better, you could release your records into the public domain.

Maybe optimal for some bands and some composers, but far from optimal for the rest of us.  Look at the incentives in a scheme of this kind, which pays musicians only for seats in a hall and rewards them for recordings only insofar as the latter fill those seats.

(1) Bigger venues and amplified music.  How does this figure for music where subtlety and detail matters, like a string quartet or a singer with a guitar? Or are all the chamber-dimensioned musical modes obsolete?

(2) Music that can draw a crowd in a few big cities with stadiums, rather than niche music that could have an audience spread thinly across the country, or across several countries.  A musician’s performing time, which includes travel, rehearsal, interviews, and the like, is about 2000 working hours a year, same as everyone else’s, and a band can only give so many concerts, so everything has to be focused on making each of those as profitable as possible.

(3) As the venues get so large that people in the back are actually watching the musicians on a scoreboard TV, and the sound is out of sync with their movements owing to distance, the music has to be tarted up with spectacle appropriate to the occasion, like fireworks, lighting, dancers, and the like.  This is a new artistic form (well, not so new: the 1812 Overture has been performed this way for more than a hundred years) but there’s a lot of music that it isn’t. Like, nearly all music.

(4) As it becomes more and more difficult to transmit subtle variation in the elements of music that have historically been quality dimensions (intonation, harmony, and rhythm) because of the acoustics and sheer size of the venues, other ways to make a big effect become more important, among the most important of which is volume.  Anyone can now play or sing really loud, so a positional arms race ensues with truly bizarre and regrettable feedback results. One is a reinforcement of the coarsening and simplification of the music itself, and another is the deafening of the audience. Especially in high frequencies, which is where, for example, the timbre of different instruments is found, hence more coarsening and simplification if music is to pay its way, and so on.

The world Yglesias portrays has no economic place for any music that can’t fill a stadium or impress a small self-replicating academy.  A lot of it is hanging on, but a lot more is not, because musicians cannot receive a price signal that they have created value for a few hundred thousand people in a few hundred cities and a few hundred thousand square miles of countryside.  The Detroit Symphony canceled its season, and probably will never have another. Well, that’s Detroit, but the canary in the mine always dies before the miners get sick. At the same time, a lot of music has lost its anchor to an audience (Verdi and Wagner, for example, no hacks in anyone’s view, thought they should write for a popular and an élite audience both) and speaks to fewer and fewer people.  Classical and experimental composers have to be professors in universities to put food on the table; some of them are good at this but most are not (most people who do anything well are not good teachers of it, and why should they be?), and their success is determined by their appeal to peers who vote on their tenure. It is not a trivial matter for a society to lose access to its most creative and talented artists.

Things are not more or less OK; they are very bad. Until we rebuild the economic model for digital goods to meet the two key design criteria of (1) marginal cost pricing to consumers, which means zero, and (2) value-based payment to creators, which means something like payment according to number of listener-hours, it will get worse instead of better.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

25 thoughts on “The music market”

  1. One, ask the musicians what they want, not the PR men that front the ripoff recording corporations, the phony royalty collecting operations that have never accounted for a penny of where the collections went, the RIAA is totally corrupt.

    Ask the people who make the music, not the lords of creation in music.

  2. The iTunes model seems to be at least sensible – it relies on the fact that most people seem to prefer to acquire music honestly, as long as they can do so at a low enough cost.

  3. “when I play an mp3 file of a song, there’s no less of it for you, so the marginal cost of my consumption is zero.”

    This is wrong. The marginal cost is zero because the cost of creating a new copy is zero. (I don’t know what the “marginal cost of consumption” is – marginal cost is a term that relates to the cost of production.) The marginal cost has nothing to do with whether the good is consumed when I use it. A book isn’t consumed when I read it, either.

    But in the case of copyrightable materials, the marginal cost has never been the correct market cost. That is the whole point of copyright. The legal restriction that prevents other people from selling my work allows me to charge a cost higher than a competitive market-clearing cost in order to allow a return to me which pays me, not only for making the physical object (the book or record or photograph) but also for my creative work. Given me the ability to impose a single-seller “monopoly” price on the market – a price higher than the marginal cost – is the whole point of copyright.

    In a copyright regime, the fact that the marginal cost is zero does not mean that the correct market price is zero. And everything that follows from this false premise is wrong.

  4. I wonder how many bloggers would be ok with me starting my own blog where I copy, word for word, their content and pass it off as my own in order to increase traffic and ad revenue. Michael, do you think that is perfectly fine since the marginal cost is zero?

  5. You’re conflating copyright violation with plagiarism. Don’t do that.

    I don’t know how many bloggers would be ok with me starting my own blog where I copied their content word-for-word and attributed it correctly, but I bet it’s larger than the number in your scenario. And presumably the number who would be ok with me downloading my favorite blog posts and emailing them to my friends is even larger…

  6. Benny, passing someone else’s work of as one’s own is a different issue. No one’s doing that with music. If you want to start a mirror-blog to RBC, and think you can get some readers for it, please be my guest.

  7. Fuzzyface & yoyo are both getting at important truths. People do generally want to support artists they like. And artists really don’t need the promise of (a chance at) David Bowie-level wealth in order to produce; they only need enough to make a decent living, and often not even that. Nobody is served by this kind of pessimism.

  8. He also gets the profoundly illuminating and useful principle that everything should be sold at marginal cost.

    I look forward to seeing O’Hare’s thesis applied to pharmaceuticals, where the marginal cost of production is pretty darn low.

  9. Ok Mark, I will be sure to copy, word for word, your new book “When Brute Force Fails” and publish it on my blog. I will be sure to make sure you have credit as author. Thanks for permission.

  10. “The iTunes model seems to be at least sensible – it relies on the fact that most people seem to prefer to acquire music honestly, as long as they can do so at a low enough cost.”

    Of course genius MBAs are doing their damndest to destroy the iTunes model…
    The iTunes model works PARTLY because of convenience, and PARTLY because of a sense of decency of the part of most of us — we might not pay for ALL our music, or when we are young and poor, or whatever; but most of us get to a point where we are wealthy enough and decent enough that we figure it’s worth rewarding the creator of those songs we especially like.

    So what is happening in iTunes these days? The hot new trend is songs that can only be bought as an entire album, or perhaps you can buy MOST of the individual tracks of an album, but to get the one good track that people actually want, you have to buy the entire album. You know, the whole bag of slimy tricks (individual tracks that you can only buy on the Best Buy version of a CD, but not on the Walmart version, tracks that are sold in Japan but not the US, etc etc) that got the audience so pissed off at retail music in the first place.
    What remains of the recording industry seems bound and determined to make those people who ARE paying for music at iTunes (or Amazon, or eMusic) so pissed off at them, that they decide, screw it, their first instincts, from the mid 90s were correct, to never let these people see a cent again, because they have absolutely zero interest in treating their customers decently.

  11. It seems to me that this is overly pessimistic for the small-form genres.

    If a musician can play 150 concerts a year and needs total compensation of $75,000 a year to make a decent living as a musician–a quartet needs to make $2000 a concert to make a decent living. That’s 200 people at $10 each. Except in very sparsely populated areas, I’d think that would be very manageable.

    It’s the large-form arts (symphony), and those with high production costs (theater) that the new model hurts; I don’t see it being that bad for the small-form genres like jazz, chamber quarter, or the traditional gospel quartet.

  12. Bloix, the whole point of a non-rival good is that the economic resources required to make it at all (compose, perform, and record a track) are not affected by how much is consumed. It’s like a public park. The marginal cost of consumption is quite precisely the value of the economic resources used up when another one (play of the file) is consumed.

    politicalfootball, the technical analysis of things like drugs (the research content, not the physical pills and bottle) is pretty close to the analysis of digital media. That’s why there should be more, not less, government sponsored research.

    Benny, you are applying a moral judgment in a world different from the one in which it applies. In the current world, where copyright is the notional mechanism of rewarding creators, downloading and filesharing is stealing, and so is copying Mark’s book, whether to sell it or give it away. In Fisher’s world, where creators are paid from a public appropriation according to how much their work is used, it isn’t. Your problem is that the correct assertion about stealing under current rules has been shown ineffective in changing behavior, I think because people understand the marginal cost argument and that it shouldn’t be. If the law gave someone rights to tax views of SF Bay, opening my shades would be stealing by your analysis. But it would be wrong to make it so, and it’s wrong to criminalize people who are trying to use digital goods efficiently.

  13. Why should free digital content be restricted to music? I say we should download books my Kleiman, O’Hare, and Yglesias for free too. We aren’t just philistines here right?

  14. SamChevre, you’re greatly underestimating the cost of those concerts: the ticket-buyers have to pay for the hall, for insurance, for publicity (or no-one comes), and for a lot of travel: a single group can’t give concerts every other night in the same town. Do you mean a quartet needs to net or gross the two large? Even if net, for a two-hour set, that’s $250/hr for working time, but assuming one performance on that day, it’s down to $60, and counting a travel day for each concert, it’s $30. Now we’re at $60K/year before agent, instrument repair, sheet music etc.

  15. Benny, you understand perfectly. The efficient market for digital goods, which includes what I make (not live teaching), the New York Times, DVDs (but not movies in a theater) and your blog has a zero price to the consumer and rewards creators according to use. Exactly the way we make and provide city parks, clean air, etc. It’s quite sobering, especially for someone like me who is no kind of socialist, to contemplate this world; it will need a lot of protections against government meddling with content, spying on users, etc. But it has absolutely nothing to do with ideology, railing about stealing, or anything except the technical properties of these goods.

  16. “In the current world, where copyright is the notional mechanism of rewarding creators, downloading and filesharing is stealing, and so is copying Mark’s book, whether to sell it or give it away.”

    I follow you so far.

    “Your problem is that the correct assertion about stealing under current rules has been shown ineffective in changing behavior, I think because people understand the marginal cost argument and that it shouldn’t be.”

    So because stopping people from downloading is ineffective, downloading isn’t wrong? I thought the argument was downloading wasn’t wrong because the “marginal cost” was zero. You should pick an argument and stick with it rather than vascillating between two conflicting points of view.

    This is incorrect too, by the way. People don’t know or care about the marginal cost argument. People find stealing music to be easy, and law enforcement difficult. The RIAA shut down Napster and prosecuted only a few people. In the mean time millions of people worldwide continue to download for free.

    “If the law gave someone rights to tax views of SF Bay, opening my shades would be stealing by your analysis.”

    So some person or corporation built the SF Bay? Because otherwise your analogy is a failure. Are you basically saying that people who sneak into movie theaters aren’t stealing? Because that is a more apt analogy.

    “But it would be wrong to make it so, and it’s wrong to criminalize people who are trying to use digital goods efficiently.”

    So again by your analysis there is nothing wrong with me publishing Mark’s book online for free.

    I am dead serious that I am going to do this. I am going to buy Mark’s book and publish it online for free just to prove that you are really just a bunch of hypocritical philistines.

  17. “I am dead serious that I am going to do this. I am going to buy Mark’s book and publish it online for free just to prove that you are really just a bunch of hypocritical philistines.”

    Since the potential buyers and readers of Mark’s book is probably three or four magnitudes greater than the number of books he’ll ever sale, putting the book online would likely increase his book sales.

  18. NO, Benny. The copyright laws are what they are now. As long as they are, it’s wrong and illegal to infringe. The laws should be changed so they don’t criminalize etc. and authors are properly compensated; if they were, it wouldn’t be infringing and it would be a better world. This is not actually as complicated as you seem to find it, and if you were as interested in the substance as you are desperate to convince yourself of the personal moral turpitude of the authors here, you would get it.

    I will be interested to see if Princeton University Press helps you act out your project (unless he signed a very unusual contract, Mark doesn’t own the copyright to that book nor does he even have the right to authorize you to copy it). Please keep us posted.

    By the way, almost every steradian in the view of the bay from any direction, except the water and the sky and some trees, was built by someone.

  19. The world Yglesias portrays has no economic place for any music that can’t fill a stadium or impress a small self-replicating academy.

    That’s not fair. There is an entire gigantic range of venues below “stadium”, such as the bars and clubs in my city. You’re not going to get rich doing it, but the overwhelming majority of musicians don’t get rich today. We’ll still have tons of bands, competing for venues and to sell merchandise.

    So what is happening in iTunes these days? The hot new trend is songs that can only be bought as an entire album, or perhaps you can buy MOST of the individual tracks of an album, but to get the one good track that people actually want, you have to buy the entire album.

    The sickening thing is that this is often supported by the bands, who think their complete album is just so special that they couldn’t possibly allow the singles to be sold separately.

    This is incorrect too, by the way. People don’t know or care about the marginal cost argument. People find stealing music to be easy, and law enforcement difficult. The RIAA shut down Napster and prosecuted only a few people. In the mean time millions of people worldwide continue to download for free.

    The “zero marginal cost” fact explains why it is happening – it doesn’t matter if people caught downloading music can explain it. You see the same thing with the film business – the near-zero marginal cost of producing additional copies means that pirates have an incentive to arbitrage this by making a bunch of copies and selling them/offering them for much cheaper than the list price.

  20. No Michael, you are completely misreading the argument that Matthew Yglesias presented that was endorsed on this blog. Matt said “But the business of selling recordings of music is shrinking. Which, of course, is exactly what ought to be happening to it.”

    So consumption of music is up but the business is down. And that is what ought to be happening. The argument is that the marginal cost of distribution is near zero, so the price should be near zero. Nevermind the copyright laws or the cost of actually creating the product in the first place. You know, the cost of instruments, time to write songs, producers, studio time…

    “a dollar for a tune is too high by, um, about a dollar, or an infinite percentage.”

    Right, as is the cost of your books. Don’t worry about Princeton Press, I’m sure Glenn Greenwald and Wikileaks will do the heavy lifting for me.

  21. “Bloix, the whole point of a non-rival good is that the economic resources required to make it at all (compose, perform, and record a track) are not affected by how much is consumed. It’s like a public park. The marginal cost of consumption is quite precisely the value of the economic resources used up when another one (play of the file) is consumed.”

    No, this is wrong. The cd in my cd player is not affected by how often I listen to it, or who I lend it to. It is never consumed. It needs no maintenance. Yet it’s still mine. It’s nothing like a public park, which requires huge amounts of money to maintain it (trash, grass, policing, tree trimming, etc.) and is open to the public.

    The mp3 on my player is just like my cd in some respects – it’s mine, and it is not available to the public. No one else can listen unless I let them. And it’s never consumed and needs no maintenance.

    The difference is that I can copy it and give the copy to someone else for free and with no hassle. And the copy doesn’t look homemade or suffer from degradation in quality.

    But each copy is a different copy. This isn’t like a lighthouse, where every ship at sea sees the same light and there’s no way to charge for seeing it, or a radio broadcast, where once the radio waves go out, any receiver can receive them. Specific, individual copies have to be made and distributed to each listener. We’re not talking about public goods.

  22. Back in the wake of the Napster shutdown, it occurred to me that a model for music sales/distribution that might have worked well would be for the record companies to introduce yet another new, higher-def recording/playback technology with a consumer ed marketing strategy, just as they’d done for CD’s. The key would be to *only* release new music in this format initially, and charge a premium for it, but meanwhile to refrain from acting against online file sharing. Those who cared enough about music and could afford it could buy music and rip it for online distribution, and in the process develop a kind of reputation economy for the social transmission of musical tastes. So there would be two markets for recorded music; a profitable-to-the-record-companies one in which they’d still have actual *things* to sell, and a reputation market of free recordings that would essentially serve as promotional materials for live performances and high-def recordings.

    Aggressive enforcement of IP laws when it comes to digital music has always struck me as something like requiring everyone to continue having blocks of ice delivered to their house after the advent of refrigerators with freezers and icemakers, just so the icecutters could remain employed.

  23. Under the current system, piracy is rampant, but lots of music is available. So what’s the problem? O’Hare’s only concrete example of a problem is the Detroit Symphony. But it’s hard to believe that declining CD or MP3 sales have much to do with the symphony’s woes. I even looked at the relevant web site, and sure enough, neither the symphony’s management nor the performers’ union blames their problems on file sharing or anything remotely related.

    Whereas I would have no problem describing the benefits of the current system, such as NPR’s free stream of Lucinda Williams’ latest album that I’m listening to as I write this.

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