Economics of File-Sharing

Umair writes "The Red Herring's got an article by me about the economics of file-sharing, which argues that the music industry should provide insurance...against itself. This is because the contract listeners sign with labels is risky - it lets labels shirk on their end of the bargain. That's why file-sharing isn't just 'theft', it's risk-sharing. The original, longer, version of the paper is here, which argues that this a situation economists call double moral hazard."

Comments

Re:That was about as clear as mud......

[Anonymous Coward]

Correct. It is not theft, it is copyright infringement, a civil issue. You can't go to jail over it, but you can over theft.

You most certainly can go to jail for copyright infringement, if you live in the U.S.:

http://www.usdoj.gov/criminal/cybercrime/17-18red. htm

~~~

Moral Hazard (was Re:Morals?)

[peeping_Thomist]

"moral" here is being used in the sense it is used in "moral certainty". The contrast in both cases isn't moral as opposed to immoral, but moral/practical as opposed to theoretical. A moral certainty is a practical certainty, a certainty great enough for to determine one's action, but not enough for a mathematical demonstration. A moral hazard is a practical danger, that is, one's action puts one in danger.

It's just how academics talk.

Re:They should provide insurance?

[GeorgeH]

The record industry doesn't have an equivalent of movie theatres.

The record industry does have an equivalent, it's called a concert.

Re:They should provide insurance?

[evilviper]

The record industry doesn't have an equivalent of movie theatres. They make all their money from album sales

That's just not true, even though the RIAA wants you to believe so...

Radio, TV, Movies, Internet, Closed-circuit radio (like when you are on-hold, or on an elevator, etc.). Songs are recycled many times, on compilations and "Hits" CDs (significantly lowering costs), and also recycled when songs are "covered". CDs are less-than half as long as DVDs, and don't need advanced processes to create the media.

I could continue to go on like this, but I think I've made my point. There are MANY, MANY, MANY ways that Record Companies make money back, other than CDs, and their costs to produce CDs are FAR, FAR less than the movie industry could ever dream. Worst of all, it's accepted fact that the actual artists (all but the very famous) are still being starved even with all that profit being made.

Re:Double Moral Weight

[evilviper]

No, no, no. "Moral Hazard" has nothing at all to do with morality. In fact, it has to do with exactly what it discussed all the time here: Giving the record companies incentive to do what the public wants, while not giving the public too many rights, and allowing the public to bankrupt them when they are doing their job.

Read the damn article.

Re:double nonsense

[Anonymous Coward]

Hi,

I'm the author. Thanks for discussing my piece. Here are some points to consider.

1) Moral hazard does not mean the record industry has 'morals'. It's a technical term - like grep, or chmod. It means that one party in a contract can take hidden action - like your babysitter - because you can't effectively monitor or influence them.

2) I'm arguing that the record industry should provide free music - not the other way around. Insurance is just another form of free music - whether you get reimbursed in money that you can spend on free music, or free MP3's, or free music vouchers.

3) An efficient market is not a monopoly. An efficient market for music is what all of us really want: a place where we can pay as much for music as the value we derive from it. The problem we're all facing is that the market for music is inefficient - that the music industry can price-fix, gouge, shirk on it's contract, and earn more profits by exploiting such tactics.

4) I'm not 'trying to give control to the RIAA'. In fact, it's the other way around. Read what DVD Jon has to say about buying into DRM - iTunes is nice, but by buying into it, you're also buying into DRM. I'm trying to argue that DRM sucks - and that entirely new business models are the only thing that will work - and iTunes is just the same old model wrapped in a nice interface. I'm trying to prove why the RIAA wants the game to stay the same - so it can keep selling the same old risky contract to all of us, in exchange for greater profits.

4.1) Not all MBA's are beancounters. Get over it.

Umair

Re:They should provide insurance?

[evilviper]

but it doesn't change the fact that only about 10% of CDs are profitable, while about 90% of Hollywood movies are.

You are making a HUGE assumption: Cause and effect.

First of all, I would dispute those numbers greatly, in no small part due to "creative accounting", but let's not worry about that for the moment. The main issue is: what would improve CD's profitiablity? It is quite likely that lowering the prices on their CDs, would make them significantly more profitable, and in-turn fix those numbers to be more in-line with the MPAA's.

The reason I am so suspicious of that, is that CDs don't show any signs of market effects... If a Movie isn't profitable, you will see that DVD selling for much much less. If a CD isn't profitable, the price still won't change, which is a very strong sign of a monopoly, not a free-market.

They can pretty gaurntee what the opening boxoffice will be based on the amount and type of promotion put into it.

First of all, that has been changing recently. The MPAA has expressed how concerned they are about technology, undermining their advertising efforts. When you can look-up numerous reviews instantly, and get instant messages from your friends, telling you the new movie is bad, advertising breaks down.

Secondly, there is a major inequality. Saying that advertising for the RIAA isn't as successful as for the MPAA, is pure guess-work, because the RIAA does not, nor has it ever, advertised at the level the MPAA does. I've seen commercials for "The Matrix: Revolutions" maybe 12 dozen times over the past few weeks. In total, I don't believe I've seen that many commercials for any CDs, period. There is just no main-stream advertising by the RIAA at all. The advertising they get is either luck, or through the hard work of the artists, and none of it is commercial in nature, as with the MPAA's commercials on network TV. You say the RIAA's advertising has failed, but they haven't even tried.

the RIAA has no idea if Eminem's next record will sell well or not

You get a few people from the general public that listen to that genre of music, and I guarantee that their opinions will match the rest of the public perfectly. The same goes for the MPAA, but they put out plenty of junk anyhow.

Re:One weakness of both articles: free always wins

[lonesome phreak]

That's why SoulSeek is still up. Much of the music on it isn't "mainstream" like synthpop, ebm, and so on. So, the RIAA doesn't care. And most of those artists probably get more business due to the exposure from the trading than they would otherwise. I know that, at least in the Midwest (but we don't really count) that most of those bands would be nearly unknown if it wasn't for some dedicated people handing out burned CDs of club music. Often people then buy the music after that - and they wouldn't have even had heard of them otherwise, so they aren't really missing any "sales" anyway.