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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."
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.
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.
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.
Anything worth doing is worth doing badly -- G.K. Chesterton
"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