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:They should provide insurance?

[peeping_Thomist]

Insurance can help move merchandise. Back when I was in high school in the late '70s, I bought an album by Gruppo Sportivo because it was advertised by the local record store with a money-back offer: if you don't like the record, return it. I bought it, liked it, and didn't return it. Since I'd never heard of Gruppo Sportivo before, I likely wouldn't have bought it without the insurance. As it is, I have one more fond memory of the cool music of my youth.

Re:One weakness of both articles: free always wins

[Sawbones]

It doesn't offer a solution but it does address the issue. About halfway through the article mentions that the file sharing systems in place have created a double moral hazard - since now some of the music "principals" (us) are shirking their responsibility to compensate the agent (the record labels) by paying for the music.

The ideal situation is, of course, sample music, find what you like, buy it. It's just that in this case it's step 3 that gets the "???".

Re:Morality? Please...

[Anonymous Coward]

Chimps have an idea of fair play and become upset when it is unbalanced. As do we. In fact it's not unheard of for members of our species to kill others in response to that imbalance.

The vast majority of people pay the bakers for their bread, not because they'll be caught if they don't but because it is right to do so.

There's an intuitive idea of ownership deeply ingrained in us. Some ideas, like we all own the jungle together, and we'll let you use this part of the jungle for a while, to the benefit of us all are part of that. We delegate our authority. And when entities like the RIAA, MPAA et al shirk or resist their obligations, or try to change them after the fact via copyright extentions etc, we keep that tally. Music sharing, movie downloading, it's an expression of the broken pact they made with us. We are many, they are few. In the final tally, that combined with the fact people will kill to address inequity, really should be something for them to think about.

Re:They should provide insurance?

[pete-classic]

I don't work in that industry, but AFAIK as often as not the money flows the other direction.

See for example How Top 40 Radio Works.

Or oddles of links on Google.

-Peter

Fair beats free.

[Anonymous Coward]

I like having the CD. I like having the case, the nice ink on the disc, the booklet, the extras like Daft Punks download offers.

When I do download off the net, it is not infrequently followed by purchases at a store somewhere. Maybe the same songs, maybe the same artist, mabey different mixes. Stuff like VS tracks I haven't been able to find retail, certainly not in compilations.

But again, it's not a suprise to me. I first heard both TMBG and BNL off of boarrowed cassette copies. Eventually I was able to barrow a copy of Apollo 18, now I own something in the neighborhood of 20 TMBG cds have gone to concerts and lament the fact I didn't get to grow up listening to them. BNL, the story isn't too different, aside from the lower album count. I bought the Saturday Morning Cartoon CD, because it has a song called Speed Racer on it, and I thought MAYBE it'd be Go Speed Go by Alpha Team. It wasn't but the CD didn't suck either.

Which ties nicely into the article sparking this thread. I pay the distributers to find the music I want to listen to. There job is to search for me. And they failed miserably with Go Speed Go. It was a hard song to find. I spent a lot of time looking. So what exactly AM I paying them for in that case? It certainly could have been harder, but it could have been much easier too. The stuff I want is getting lost in the stuff they're telling me to want. As I suspect happens with almost everyone who's not 13 to 15.

So how to I redress that imbalance? I share, I download. If it's something I really want, I buy. Not only do I take on the responsability of searching for myself, since they've abandond me despite my willingness to spend money, and I punish them for not keeping their part of the deal. I download stuff I think friends might like. I share copies I decided I don't like to improve network availability for those who do like them. And the random good song from the people who produce one decent song, and nothing else but crap, I just keep. It's my tax on them.

When they decide to live up to their part of the bargain, I'll consider revisiting mine. They better hope I don't get too set in my ways. Habbits are hard to break.

Re:One weakness of both articles: free always wins

[Moochman]

While it's true that many gawk at buying music when they've got broadband and KaZaA, I think there's a decent population that would be willing to pay for music, on CD or otherwise, if it came with extras such as interesting CD booklets (or downloadable versions thereof).

But as for this article, it misses the point that it itself initially makes: the companies aren't investing in the search for the artists.

This is enabled by an aspect of the music industry that the author doesn't take into account: MTV and radio. The way it works is basically: Industry says to MTV: play this music video; MTV plays it repeatedly; the video is seen enough times that the song get stuck in viewers' heads; the viewers then request the song on radio; and finally the song gets played so much via radio that everyone knows it and are brainwashed into buying the album, because it's got that song they know and love. The song could be absolute crap in comparison to everything else, mind you, it's just a matter of what the industry decides to support. Generally the looks of the artists are the deciding factor.

Only rarely does truly original, interesting new music get played on the mainstream radio stations, and then it's usually a battle for it to really become "mainstream" (because, after all, it's not a music video on MTV so no one's heard of it).

So, basically, since the recording companies CAN control listeners' preferences, they do. Smarter listeners (the ones who seek out interesting music themselves), on the other hand, have no easy way to connect into the closed media-driven circuit. And they end up downloading music online, or copying it or ripping it, simply because there is no easier way of discovering interesting music short of shelling out tons of cash.

Therefore, the problem that needs to be solved is that the industry needs to do its job and seek out the good music, not make up for its laziness by offering cash-back incentives, as the article suggests.

Until this starts happening, I don't see any reason I should go into Sam Goody.

double nonsense

[danharan]

So some guy that used to work for the World Bank wants to make a market more efficient. Surprised?

Of course, as whirled bank types are wont to do, they might actually distort reality to make their models fit onto it.

He recognizes early on that the labels are expected to "take on the risk of talent search, artist development, and distribution costs, in exchange for profits", but then only focuses on talent search.

Downloading files from Kazaa is not doing the work of a talent scout: it is about getting stuff for free. Pretending it's about being a talent scout is laughable.

Also, who's doing the work of artist development and music production (those mp3 are usually recorded in studios...)? The problem is, the labels are often shirking those responsibilities too.

I recognize that downloading copyrighted music is illegal. I also think it served a good purpose: CD prices have gone down - at least in Canada - and we are getting better legal ways of buying music.

While his description of the problem stinks, this is a case of "moral hazard" if that's what you want to call it.

His solution has some merit in that it might encourage labels to try developping unconventional artists (assuming most of the people that hear the songs decide to not ask their money back, and that this type of contract makes them more likely to try new things).

OR - You could of course just provide free music- radio is after all one way to do that, and all the label types know that radio play sells albums.

We don't need new contracts so much as new business models. Keep providing free music, since that works. Also take advantage of new distribution (bye bye music stores with underpaid staff, hello iTunes).

And use all this to promote live music. Since it's easy to keep track of what people buy, you can tell them when their favorite bands are playing near them. Is this so complicated?

Of course, this type of arrangement might be the death knell for large labels... in a market like this, you could arrange to have smaller regional players.

Umair Haque's proposal seems custom-designed to evade most of the issues, and keep the big labels alive. I'm not so interested: they've proven to be companies that don't care about art or artists, and are willing to gouge consumers. Enough!

Re:One weakness of both articles: free always wins

[peeping_Thomist]

if it came with extras such as interesting CD booklets (or downloadable versions thereof).

This is one of my pet peeves: back in the 1970's, album covers and inserts were an art form. You would buy an album, take it home, open it, put the record on the turntable, and then sit listening to it while you absorbed the cover art and (often) the fold-out section. It was a true multimedia experience, and many of my memories of favorite albums are inextricably linked to the tactile and visual sensations of the album cover. The covers were huge! They filled your entire field of vision! And they were designed by interesting artists who built in elaborate connections to the music itself.

Those days are long gone, and it's a sad thing.

Zero dollar economics

[SolemnDragon]

I won't speak to the moral issue. What i do have to offer is the thought that the dollar value goes to zero, but the perceived value doesn't. THat's because there's a shift from tangible assets to intangible assets happening.

When the dollar amount goes to zero, you evaluate a choice by how it affects your perception of yourself, and how it affects the possibility of future tangible assets. In this case, yes, the dollar cost to the consumer is near zero. However... there is a perceived dollar benefit (not having to buy the music) plus a perceived moral benefit, because the RIAA has been acting like the bad guy. The RIAA has been trying to counter this by upping the dollar cost (suing) rather than upping the intangible benefits. If they dropped the dollar cost, this would up the perceived moral value of keeping the RIAA afloat. But because they've become accustomed to dollars-only economic measures, they aren't likely to get this soon.

The other major factor here is that customers aren't just ditching the dollar cost- they are choosing to offer it more directly to the producers (in the goods sense, the producers mean the musicians and the small labels bringing them to market.) People aren't just ditching music. They're trading and sharing- and many are contnuing to spend, just in ways that don't benefit the RIAA. So the perceived-intangible-value really is getting a field demonstration.

Re:One weakness of both articles: free always wins

[mniskin]

I don't think the RIAA is too upset about people downloading small numbers of unknown artist's music. Most of the crap on kazaa is mainstream garbage like 50 Cent and the like. Not that I don't enjoy it, or anything, though. But the point is that the vast majority of kazaa users just want to download the very product that the "agents" are contracted to find for them. They obviously like what they're being fed. If everyone left Ludakris' new album alone and instead ripped and traded Joe Banner's Nostalgia Quartet and Ukelele Band then there would be no problem.

So basically, what I'm saying is this: complaining about the quality of the choices that the music industry makes when they decide which artists to market is completely a moot point. All they are upset about is that they do their job only to have the consumer reneg on their side of the bargain and download their products for free, but only after benefiting from the music industry's work and investment. The proof that they have held up their end is that the consumer vastly prefers to steal music industry supported artists to unknown independents.

They left something out

[HangingChad]

On the label contract side they've reduced their risk to near zero by charging back development and promotional costs to the artist. Even a successful artist ends up getting jack from CD sales. The big media companies have been dicking the principles on both sides of the contract going on 50 years now. Is it really any surprise they fight like hell for survival? None of the big labels want to see that gravy train reach the end of the line. It's easy money. Fat City.

But their efforts in Congress and the courts are useless. They're just breeding smarter file sharers. Especially those in the technology business, people who have maybe worked on projects together over the years. A group of friends who exchange playlists the old fashioned way: ASCII text. They can swap songs and entire CD's in compressed, encrypted formats because we- I mean they -don't make their collections available to the public and know enough about transfer protocols to make detection damn difficult. Or maybe they snail mail CD's, thumb drives or USB hard drives for the really big jobs.

As usual the bullies pick on those least able to defend themselves.

Re:One weakness of both articles: free always wins

[Michael Spencer Jr.]

I think we're departing the article's topic a bit here, but you're right: it's interesting to discuss the cost/benefit decision users make when they decide whether to use an online music service, to buy CDs normally, or to break copyright law and download music without paying. I just think this wasn't the main point of the article. If people feel like discussing this, and today's moderators don't think it's too offtopic, we might see some interesting and important observations.

I'm repeating myself a bit here, but I don't really think I'm qualified to talk about consumer behavior. I am not a psychologist. Economics says that there probably exists a curve to describe how much of the population will evaluate that cost/benefit decision one way or the other. Many would argue that this broad economic view of the decision isn't really adding anything to the discussion -- of course some people will switch and some won't. A more interesting discussion would cover why people switch and why they don't: how much people value the money it takes to buy music legally (an easy discussion) and how much people value the moral and legal risk involved in breaking copyright law and downloading copyrighted music (a much harder discussion).

A discussion that tries to answer these questions must deal more with psychological issues than with economic issues, so it might be offtopic for this article. I won't stop others from discussing it here, but I don't have much to contribute. I'll leave this particular sub-topic to people with more interest in psychology and predictive consumer modeling than in economics.

Some Tools for Thought...

[dyoo78]

"Fundamentally, I'm going to argue that consumers download music, as much to derive extra value from getting something for free, as they do because they want insurance against buying something they didn't want in the first place. File-sharing is as much about risk-sharing as it is about the 'theft' of value."

The article addresses market failure through the lense of information asymmetries, moral hazard and agency costs. These explainations are classic economic (Ronald Coase) explainations of why there is a failure in the music market. Yet, the fundamental argument of this paper - that double moral hazard and information assymetries cause market failure in the music industry - misses the fundamental point of market failures in ALL information markets(software, music, art, books, etc).

Information goods resemble public goods. Consider the three tenet assumptions in properly functioning markets. The assumptions are 1) that the good is rivalrous, 2) that the good is excludable, 3) that there is full information when purchasing the good. Combinations of these three assumptions results in various types of goods, which require different economic models to solve. For instance, if the good is non-rival or non-excludable, the good is considered a public good. Some examples of public goods are public parks, the sun, air, etc. These types of goods are non-rival because your consumption doesn't deplete the good such from other users/consumers. Likewise, these goods are non-excludable because it is very hard to put a fence around it, and hence, rationing such good by a price mechanism.

Now, consider information goods in this sense. Information goods resemble public goods because they are non-rival and non-excludable. My consuming the information doesn't deplete the good and prevent others from using it and excluding others from consuming information (putting a fence around information) is very difficult. The fundamental problem within the music market is that we have a market failure from the start precisely because music is 1) non-rival 2) non-excludable.

The author tells us a story about the music market needing risk insurance, yet fails to consider the very notion of economic exchange in information goods. The problem with music is this. Consumers want music and indicate their preference for music by voting with their dollars. Yet, when the marginal cost of distributing the good is nil, and those that shouldn't be excluded from the market are being excluded, we have a problem. When you want to reward creators of music, and not exclude anyone from the market without specific reason, what is the right price you should sell your music?

I agree that there are problems with value indicators, (i.e. price of all music is the same ($12) and consumers can't reward music creators based on societal value), but I still see some fundamental flaws in his argument.

So who's working on the economic problem of information goods? Enter Suzzan Scotchmer, Brad Delong, John Zysman, Steve Weber, and Hal Varian.

These people are all Berkeley professors who discuss micro/macro level frameworks that give us tools for thought in information markets. There is an academic revolution going on at Berkeley and I'm very thankful, I am here to witness it. ;)

For your reference, I am an undergraduate at UC Berkeley and have studied information economics for some time now. More information about me can be found here: www.dyoo.tk

Legality

[t0ny]

Ive always been curious about something, but since I was never interested in the whole MP3 thing, I never looked into it.

If you already own the music, is it legal to get MP3's of that music off the internet?

In my case, it would be a collection of around 100 tapes (not CDs, but tapes). The tapes still work, but obviously it isnt the most convient media format. Would it be legal to just get higher quality files of that music? Or is their contention that you dont own a license to the music, but are tied to whatever media you purchased it on? Im sure this runs into what boundaries there are for 'fair use', but IANAL.

The reson this is all a load of crap

[SiliconJesus101]

The bottom line is that people like to get shit for free. No matter what the recording labels do people are still going to download the music free because....well....it's available!

It gets pretty tiresome to see all of the "analysts" posting why they think P2P apps are popular when the real truth of the matter is that humans as a species will choose the free route to obtaining goods and/or services whenever possible. Hell, even those that know that what they are doing is wrong will still download the music for free. It's not "really" illegal if you don't get caught and you are only hurting a big mega monopoly and not some poor individual.

Sure, services like iTunes are selling tons of music, but I would wager my services as a fluffer for the gay porn industry that the iTunes buyers are the same people that have bought music legitimately all along and the "Napster" thieves will never buy music no matter how cheap it is as long as it's available for free elsewhere!

One at a time might work

[Frisky070802]

The Ninja project at UC Berkeley a few years ago had an interesting wrinkle on this. They had a music sharing system in which the music stored on disk could only be served to one person at a time, and then only if it was in the server's CD jukebox or a CDROM drive on a workstation. (This is how I recall it, but the link to the USITS paper talks about downloading a song only if the user has uploaded it, a different policy.) So it was a way to share actual CDs, but using compressed audio to make it feasible (many CDs playing at once even though the jukebox could only play one).

I don't know if the music industry would accept this as fair use, but it would certainly seem reasonable, much like a library lending out a copy but only for the duration of a given play. Perhaps it's a model for a new "legal P2P music sharing network": register CDs, ensure they can be played but not copied (perhaps with trusted client software), and prevent simultaneous play.

I'd sign up for that, and throw in my collection of maybe 1000 CDs.