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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.
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.
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
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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.
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.
4. Because they're honest.
Hard to believe, but there are a whole bunch of honest people still out there. If there weren't, who would all the dirtbags rip off?