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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."
Both of the linked articles make a compelling case that consumers embraced file-sharing as a form of insurance in a situation of moral hazard. What the articles don't explain is why consumers would be willing to move away from file-sharing toward any of the various proposed contracts.
Anything worth doing is worth doing badly -- G.K. Chesterton
BTW, has anyone recieved their settlement check?
Such a system might, for example, reimburse listeners for a certain amount of music that they find unsatisfactory with cash, free music, or music vouchers.
How does one define "unsatisfactory" with music? Kind of complicated to measure.
File sharing is not simply theft.
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.
In an extreme case, the labels might begin to impose costs beyond the actual search and production costs for which listeners are actually interesting in paying just to feed the bottom line. That is exactly what the recording industry did well before file sharing existed. The result? Alienated and disgruntled customers.
And the industry continues to do so. It hasn't reduced prices since CDs came into existence, which is at least curious, since the cost of pressing those CDs must have dropped through the floor since then.
risk sharing isn't supposed to scare you into doing anything. It's supposed to explain why you feel compelled to spend time searching for and downloading music on the Internet.
You don't trust the record companies or agree with their price structure. So you go around them... betting that your time is worth less than the extra money you're spending for the "service" of the record companies packaging and delivering it to you.
He's basically saying if the record companies stopped being such tight-asses and gave you the benefit of the doubt, or cut listeners some slack with well-thought-out services, then it wouldn't be an issue (duh).
Fuck Beta. Fuck Dice
Release all music under a Creative Commons license, sell stuff by public ransom if you become popular, and own all your own music rights. Instead of Marketing owning the musician, the popular musician could hire Marketing on commission when they've already got a hit, and sell rights to commercial interests. Sounds pretty good to me.
-1 Uncomfortable Truth
What if, for business reasons, the labels are more interested in their own economies of scale and brand identity than providing listeners with music they value?
I don't think the music labels are big on making themselves a brand identity. Aside from text in music videos, and small icons on cds, they are not recognizable to most. A brand identity implies that everyone knows the brand, even if they have never used the product. Coke can be classified in this way, since it is one of the most recognizable logos around. -Kilka
If we don't believe in freedom of expression for people we despise, we don't believe in it at all. -Chomsky
The author seems to be implying that people will change their habits, either by choice or by legislation, based upon an obligation to the artist or recording label. With something so abstract, the cited economic principles don't necessarily apply here -- the good can be replicated at almost zero cost, unlike stealing something else such as a lemon from your local grocer for example.
In the case of stealing from the grocer, morality is somewhat different because the lemon pool you are drawing from is finite and depletes the supply. But copying a bunch of data to your 120G hard drive that is only utilised to 20% has no perceived cost and does not deplete any one else's resource.
The issue is more complicated than what is stated, and the equalisation schemes suggested do not take away from the fact that downloading a piece of data has almost no variable cost. Do economics work when 0 is in the denominator?
I'm not trying to slam on you, but you didn't read either of the articles so set yourself up. You don't understand the principal agent problem or what he means by moral hazard. When economists talk about moral hazard, they're speaking of incentives, not about going to hell. And risk sharing in this manifestation is something you're supposed to like--it upsets the labels not consumers.
The problem is with the way we buy music, but have no ability to return it if it sucks. So the music industry has no incentive to make the product satisfactory, so long as they can find a way to get us to buy it (albeit making the song good is a good way to make us buy it). So music pirates' response to this is a form of risk sharing--We diversify the risk of a song sucking over everyone who downloads it. Because we have pooled our resources and invested less in any one product, we have less unique risk (from bad mp3s). It's not a very good analogy, but it makes some sense.
From the Article.
Is there a way out of this mess? Can the record industry offer it's own insurance, so listeners do not have to file share? Can it do so without creating a double moral hazard? Yes - by shifting to a more sophisticated contract.
I'd rather just get the RIAA out of the distribution side of music, they don't belong on this side of the fence. With the RIAA trying to control the distribution channels, they just strangle new technologies and screw the artists who they supposedly support.
With Senator Orrin Hatch the riaa whore and Corporate Elected Criminal is just trying his damnest to go after these p2p users, using piracy as an escape goat to mask the problem that only concerns the RIAA. Control of distribution.
iTunes and Napster2 already show people will buy music online. Just need to get more Indie/Alternative music available, which even cuts more into RIAA funds.
Even though it's becoming intolerable, it's not the whining of the music industry that bothers me most.
What bothers me most is that premiums on automobile, homeowners, life, and health insurance are going to be steadily raised to cover the losing business investment in recording insurance.
No matter which way this goes the consumer will end up paying from both ends and the pyramid will continually funnel the money upwards.
+++ATHZ 99:5:80
This is bullcrap. If I don't care and feel no moral object to downloading music, why would 'risk-sharing' upset me. I don't even know what risk sharing is!
The moral impact of downloading music for me is ZERO, in spite of what some MBA monkey tells me. 'Risk sharing' isn't going to scare me into sharing less.
I understand the author cites Risk Sharing as a primary reason why people aren't buying music. Read the article, and you can see some definite implications of record companies' misjudgements.
The author claims that the reason why people aren't buying music is that because they don't know whether it is any good. This risk, the risk that the music you just bought for $18 totally sucks, is the risk he talks about.
When he says that people are mitigating risk via file-sharing (i.e. risk-sharing) he implies that by one person buying the cd (or taking some other cost to self, including risk of legal action) and distributing it to others, then others get to "try" the music without risk.
Of course, this brings up the fundamental problem which I believe lies within--Are people willing to pay for music? Currently Steve Jobs and others are trying to prove their particular answer.
Then we'd have the same situation we had in 1996, with record labels going batshit insane and trying to shut down MIDI sites.
The business model works like this:
1. Create catchy sounding music by whatever means necessary, doesn't need to be original or high quality, just needs a hook.
2. Play it on the radio and tv, push the musicians into the public eye with advertising
3. Clubs, shops, other tv/radio stations etc will start playing the song because everyone else is, at this point you have successfully made a 'hit'
4. Sell, rake in profit
After a set number of years a song will have left most peoples memories so it can be 're-released' using its original familiarity to create an instant hit, you must make sure that the re-release or re-mix has an extra underlaying beat or melody or is faster or louder so that the original pales in comparison and people will buy the new song, alternatively parts of the melody can be broken down and re-used as scrap - you will probably notice scrap melody in anything by Blue or Justin Timberlake and many others - it sounds like something you've heard before but you just cant put your finger on it.
And remember the all time rule of the entertainment industry: If it worked the first time, do it another 10
(Big Brother, PopStars, Making the Band, Generic boy/girl bands that all sound the same, teenage girls that all sound the same, Changing [rooms|places|clothes|wives], Im a celebrity [insert something here], The worlds worst x, something island x, Airport/Cruiseliner/Hospital/Cops)
PS as a brit im really sorry for Popstars, but here we now have Fame Academy 2! its much worse and they dont even have that cool guy that tells everyone they're shit. I think we just finished Big Brother 3
This comment does not represent the views or opinions of the user.
Music, video, and software are all obvious examples. Why buy music one can record from the radio virtually free? Largely because its a hassle and takes time. Why go to the movies or rent a DVD when you can just wait for it to come out on TV? Again, time spent watching commercials and the inconvenience of scheduling are worth more than the few bucks. Why pay the M$ tax when you can just download linux for free? Because it takes time to both do it and acquire some technical knowledge.
Drop prices, sell say 3 or 4 cds for $10.00, thats how I buy a lot of books, if I want to test drive new authors etc, go to the supermart, or shop that sell the end of run/failed stuff, at 3 or 4 for $10.00 I can be confident I buy at least one that I would have paid >= $10.00 for. The recording industry have priced themselves out of the game, and there too dumb to see it.
in my life God comes first.... but Linux is pretty high after that
Francis Smit
The article talke about how customers can now simply go out and find their own music on the net, rather than rely on a brand to determine what is good music so they can sign them. Does anyone else think that that basically says it all? Labels are obsolete in their current form. What services do they provide, exactly?
CD stamping? Cost has become so cheap that it's hardly part of the equation.
Promotion? I suppose, but at the cost of an artist's livelihood. In effect, the artist is paying for it anyway, so they could just hire an advertising firm and be done with it.
Talent selection? OK, if this were the case, would we not all be listening to at least a portion of the top 50 most of the time? Why is it then that many artists that aren't signed to a major label become cult phenomenons on the internet?
Places like Magnatune try to advance the definition of the record label to something more useful, and I sincerely hope they succeed. But to the rest of the labels, my message would be simply evolve or die. Because if you don't evolve, you're simply not going to get my money one way or the other.
It's better to vote for what you want and not get it than to vote for what you don't want and get it.
- E. Debs
To pick a few points:
(...) There is no monitoring mechanism, so listeners cannot tell what the labels are doing; conversely, labels cannot really tell what listeners' preferences are.
To start, of course labels can tell what listeners' preferences are:
1) Focus Groups/Market research
2) Sales Charts
3) Payolla effectiveness
On the other hand, listeners do not know less about what labels are doing than, say, drivers do about what automakers are doing. In both cases the final output offered to consumers is the monitoring mechanism.
In an extreme case, the labels might begin to impose costs beyond the actual search and production costs for which listeners are actually interested in paying (...)
And, in any case, how might they not ? For any price above zero there are always listeners for whom the price is "beyond what listener is interested in paying".
The problem is compounded because music is an experience good - its value is not directly knowable to buyers until they have begun to consume it.
I can hardly think of a good more experienced before purchase than music. Even before napster. Its not like looking at a brochure for a caribbean cruise.
(...) it is important to note that the mechanism used should make strategic sense, (...) for example, reimburse listeners for a certain amount of music that they find unsatisfactory with cash, free music, or music vouchers.
Strategic sense ? Does this article sound like a consumer advocate making believe that what is good for the consumer is automatically good for profit oriented corporations ?
Quem a paca cara compra, paca cara pagará.
Guess there isn't enough "paying for better service" customers.
Or maybe Apple had to allow the labels to take too large of a cut in order to get them to go along with the whole iTunes idea in the first place.
Now if you can show me that the music labels are losing money from iTunes, as opposed to Apple, then maybe you'll have an argument.
The increasing consolidation of control of radio stations is another factor that has contributed to the economic "moral hazard". With behemoths like ClearChannel controlling a large chunk of the radio market, the local DJs who know about what their listeners want have less freedom to decide what to play. As a result, what they play more reflects who the RIAA execs have decided will be their next thing (or yet another album from the last big thing), instead of reflecting what listeners want. So we have the same songs by the same artists being played over and over and over again.
The current arrangement with the media conglomerates and the airwaves hurts both the public's ability to find out what is good music and the propensity of the producers to find out what the people want. They are more concerned with pushing a predetermined set of artists who they deem shall be successful, than they are with finding out what people like. So people will turn to file-sharing where they can find lots of good music that they would never hear on the radio.
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There is inferior bacteria on the interior of your posterior.
The author assumed that media companies mediate between consumers and artists. Another major factor is that media corporations mediate between both consumers and artists and government. The very existance of copyright laws is a mechanism created by government. Other societies have sometimes used other mechanisms to fund the arts-for example in the old Soviet Union, artists received a stipend from the state. In the 1700's, artists such as Mozart would sometimes find patronage from members of the nobility.
The copyright laws in the United States today go substantially beyond the mechanisms first mandated by the constitution--the concept of "limited time" for Copyrights is getting streched. I personally don't think the Founding Fathers really meant for Copyright to be such a big part of people's lives. Had they understood how information technology would evolve, I think they'd have wanted a substantial mechanism for funding freely available educational and cultural material--just as much as they wanted infrastructure like roads and bridges.
Instead, what we have now are major media monopolies that actively work to get greater concessions from government and media companies that are major recipients of corporate welfare.
While I agree with most of what the author has to say, I think there is one component of the problem that is being overlooked. The artist (aka the manufacturer of the goods found by the agent) is still getting screwed. While insurance or contractual obligations related to the quality of the product may make the principal more satisfied, the manufacturer is still getting very little profit.
As a result, I don't think fixing the distribution side of the problem is enough. The agents in this equation can serve a useful purpose - finding quality music and providing it to the masses - but they need to do it fairly. This is only recently the case; as the author points out, file-sharing has enabled the current situation. Now that iTunes and the likes are beginning to show that direct distribution can work, I think the record labels need to get back into going about their business legitately. That means finding music that really is of decent quality, knowing what consumers actually want to listen to, paying a decent price to the musicians and charging a fair price to the consumer.
Sure, I can go out and browse music online in hopes that I'll find something I like. And, when I have time, I probably will. But when I don't have time, I'd like to know that the people who are being paid to take care of that for me are actually doing their jobs.
Crazy Cheap Domain Hosting!
People buy music for 99 cents a track for three primary reasons:
1. Because it's cool
2. Because they're afraid of RIAA subpoenas
3. Because they're too dumb to run a filesharing program
That's it. Myself, I don't think compressed music is worth 90% of the price of uncompressed music, especially considering the fact I don't get the original artwork. I've bought a couple of tracks on iTunes, though - the ones I couldn't find on CDs. For everything else I use Half.com.
[Hey, if you're the author, why are you posting as an anonymous coward?]
Yeah, weird. I mean, all the other World Bank emeritus economists have Slashdot accounts...
(But seriously, Slashcode would be improved if people directly mentioned in an accepted story were auto-emailed special passwords they can use to post comments about their story with a a +2 "Primary Source" bonus)
Hi Dyoo,
I've read the authors you cite extensively obviously, so here's a quick response.
I don't see market failures in all digital markets. People download porn (and pay), people play video games (and pay), people subscribe to the WSJ (and pay), etc, etc.
This is the problem the the Varian school - they're missing the obvious. Digital markets can work - they don't always fail. I wanted to approach the problem from a very different angle, because the network econ/public goods approach always breaks down in the face of the real world.
But the biggest problem I have with the Varian school is that it fundamentally thinks that value is about exclusion - this leads inevitably to DRM strategies, which try and exclude people. I don't think value is always about exclusion.
Information goods aren't purely public goods. They're not really non-rival in consumption. They're non-rival in replication. But these can be two very different things.
Here's a question for you: using the Varian approach to analyse file-sharing where do you end up? That's the problem. (The answer is nowhere - the model breaks down). That;s why I used old school econ instead.
FYI, check out Stan Liebowitz for some very nice critiques of the Berkeley school of network econ.
Thanks for the comments.
Umair.
One of the things I miss about the glory days of Napster was being able to look at the entire list that someone had shared. Currently you can really only look for what you're already looking for and can't easily find new music. Let alone find something you really like. It's free, but not ideal by any means.
...well... ...could it really get any worse?
One summary of the article is simply "selling individual tracks alone won't cut it." Selling individual tracks at a reasonable price with guaranteed quality and availability is not enough.
If they can introduce listeners to music they may like but do not yet own, then they will succeed. If not...
Rule #1, people are stupid. There are no exceptions.
The industry's position is that you bought the media along with a license to view the content which is tied to that media. A strict interpretation of "fair-use" is that you have a right to make personal copies things on your own media, and you are allowed to publish portions or derivatives of works as part of a criticism, satire, etc.
In Soviet America the banks rob you!
Casting the relationship between consumers and record labels as a principal-agent problem with moral hazard is both incorrect and completely misses the point. The author seems to be aware that asymmetric information between principal and agent is necessary for moral hazard to exist, but the asymmetries the author points out are either not unique to the music industry or just plain wrong. let me explain.
The author asks "So what if, under such a contract, the interests of the record labels (the agent) diverge from the interests of the listeners (the principal)?" Well duh! *Any* industry can be thought of in an asymmetric information principal-agent context with respect to consumers (do you know exactly how every good and service you buy is produced?!), and their interests will trivially conflict (businesses maximize profit, consumers maximize their satisfaction). What's so special about the music industry here? How is the industry's attempt "to impose costs beyond the actual search and production costs for which listeners are actually interesting in paying just to feed the bottom line" different from *any* other for-profit business? Since when do consumers need to know the exact production costs of everything they buy for markets to function well?
Furthermore, the reasons the author gives for the information asymmetries in the music industry are bogus. He claims that under uniform pricing schemes "prices do not serve their usual function of providing an informational feedback loop between labels and listeners". I suppose he never heard of 'sales figures' as an information feedback loop! The author claims that information problems are compounded because "music is an experience good - its value is not directly knowable to buyers until they have begun to consume it." True, but irrelevant! Most people have the opportunity to know more about the CD they buy before they buy it than they can know about most other goods they buy; they can listen to singles on the radio and TV, listen to 30-second samples of every song on sites like Amazon, listen to the whole album in the music store or even borrow the CD from a friend. If there's a problem, it's not that we don't know whether an album has crappy songs, it's that we're forced to buy the crappy ones with the one or two good ones that we like. It's *not* an information problem. Further, consumers need *not* "coordinate amongst themselves" to influence labels any more than they need to "coordinate amongst themselves" to influence any other manufacturer: sales and commercial success speak for themselves.
What *is* unique about the music industry, the movie industry, the software industry and information goods in general is that the internet has transformed them into *pure public goods*, like, for example, national defense. There are two characteristics that define pure public goods: (1) their consumption is non-rival (my consumption of one unit does not affect the ability of anyone else to consume the good. Think of the effect on your neighbor's consumption of his music if you digitally copy one of his CDs, or his consumption of national defense if you increase your household consumption of it by having a baby, compared to the effect on his consumption if you drive away in his car) (2) their consumption is non-exclusive (you cannot prevent a newborn from 'consuming' national defense, and it's difficult or impossible to prevent people from copying information in the internet age, whereas it's possible for your neighbor to prevent you from using his car). Another way to think about pure public goods is that they have high fixed costs of production for the first unit and zero marginal costs of producing additional units.
Pure public goods are a well-understood type of market failure (you'll see them discussed with 'externalities' in most Economics textbooks). The producers of information goods have attempted to solve this problem by making information goods 'exclusive' (a.k.a. DRM) which is sufficient to solve the market failure and eliminate the 'free-ri
Imposing Libertarian views on everyone online since 1992.