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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."
They should just pass a law to force everyone to use 14.4K modems unless you own the totality of the music owned by the RIAA members, and still have the original bill, of course.
Or sue "teh interweb"
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
a double moral hazard would be an evening with the Hilton sisters.
BTW, has anyone recieved their settlement check?
Pass legislation establishing a breif hunting season on lawyers representing trade associations.
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.
Also known as damned if you do, damned if you don't.
sarchasm: The gulf between the author of sarcastic wit and the person who doesn't get it.
The truth of the matter is, I feel no qualms whatsoever for downloading musical files (actually I probably dont listen to any label that is part of the RIAA anyway)
./ers with super high speed connections sharing high quality files.
This is the crux of the problem, although they have scared the P2P Kazaa kiddies off with the RIAA's actions that has done nothing but make the P2P more well run and it is now the dominion of
An analagous situation can be seen with the "War on Drugs", all it has done is improve the quality of the drugs being used!
Post apocalyptic gaming goodness
Moral Hazard implies that the record companies have morals.
They don't.
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
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.
"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.
Anything worth doing is worth doing badly -- G.K. Chesterton
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.
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.
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!
Information: "I want to be anthropomorphized"
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.
"I'd say 'Have a good time,' but arson is still illegal.
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.
hmmm ... restaurants that had a return policy on food after eaten ... hmmmm fully proccessed or partial ... on second thoughts I don't want to know or see that!!
in my life God comes first.... but Linux is pretty high after that
Francis Smit
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.
Slashdot gets worse every day... Pipedot: News for nerds, without the corporate slant
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
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.
That's our life, the big wheel of shit. - The Fat Man, Blue Tango Salvage
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.
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.
---------
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.
I'm not exactly qualified to pick bones with this guy on matters of economics, but I have to, because he's completely wrong.
He says that music pricing needs to vary in order to convey information to customers about what they're getting. But the value of music isn't intrinsic to the music. What I may be willing to pay $1.25 for, you may only be willing to pay $.02 for. The fact that the RIAA has valued this particular song at a given price tells me nothing about its value to me. The complete inaccuracy of this detail of the article is borne out by the success of the iTMS in the face of various other services, such as buymusic.com, that have failed miserably despite variation in their pricing schemes.
The idea of variation in pricing won't work because songs are not interchangeable. When I'm shopping for a piece of hardware, I might pass on, say, an iPod, because a cheaper device will do basically the same thing, and I'm willing to get a lower-quality device if I can pay less for it (actually I'm not, but that's another discussion). When I'm shopping for music, though, I'm not going to say, "Oh, that Dylan track is too expensive--I'll buy this Radiohead song instead." One song is not a replacement for another, or I wouldn't have 12,000 of them.
The way to give customers information about what they're buying before they do so is not through pricing, in this case, but through recommendations. If I buy a zillion Dylan albums, several Simon & Garfunkel albums, a few Pink Floyd albums, and some Tom Petty albums, the iTMS should say, hey--maybe you'd like to try some Weezer. It should keep track of what I buy, how much I like it, and what I might like based on comparisons of my history to those of other users. Then, maybe I would use it a bit more. Instead, it's simply the first place I look when I have something specific in mind that I want to buy. If it made recommendations, Apple would be convincing me to buy music when I otherwise would not; instead, they're convincing me to buy music from them when I would buy music anyway, which is a lot less effective.
I found the meaning of life the other day, but I had write-only access.
"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
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.
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.
Manipulate the moderator system! Mod someone as "overrated" today.
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!
"The strong will do what they want, the weak will do what they must."
-Thucydides
Water is the best example I can think of. It's available out of the tap for virtually free, and the free stuff quenches your thirst just fine! Yet, the bottled water industry is worth BILLIONS! Why? Several factors. One is convenience. Bottled water can be taken along, easily refrigerated, etc. Second is taste. Whether it be true or not, the PERCEPTION is that if you pay for water it must taste BETTER!! Third is purity. Though city water must meet strict purity standards, people believe that bottled water is better, even when it's tap water that's simply been filtered again. Fourth is flavor. Though people can put their own lemon juice into tap water for a nickel, they still happily pay over a buck for a quart of water with: 'essence of lemon'. Fifth is style. People perceive certain bottled waters with 'cool'. Look at Perrier. Or Pellegrino. It sells for three bucks a quart bottle. Tap water is for mixing with scotch. Perrier and lime are for drinking INSTEAD of scotch! The reason water makes so much money is because the bottled water industry created the need and then fufilled it. They didn't do it by calling their customers idiots for drinking tap water, They did it by telling their potential customers that drinking bottled water is the SMART, COOL thing to do! They created PERCEIVED VALUE for their product. The RIAA does just the opposite. They call their customers crooks and swindlers. They foist crap music upon them. The container they put their product into hasn't changed in a quarter century even though there's a HUGE demand for a smaller, more convenient one. Then they wonder why people are drinking 'tap water' from kazaa. There's no reason why the bottled water example can't be used for selling music. The record companies just need to buy a clue...and a big bottle of Perrier to drink it down with!
When I worked at a radio station many moons ago, we would occasionally go through an ASCAP audit. Basically, the radio station carefully logs every song played on the air for a specific time period and then uses this playlist (along with other radio stations' playlists from around the USA) to allocate payments between its member composers. The radio station (and any venue that plays music, including restaurants, bars, etc) pay a yearly ASCAP fee.
Why doesn't the RIAA offer something like this as well? We, as consumers, have the option of coughing up 10 bucks a year for a blanket licensing agreement. With this license, a consumer can swap and trade files to their heart's content and the RIAA could keep track of which files are being traded the most online to allocate how that pool of license fees should be divided among its constituents.
Maybe it isn't the RIAA, but some new organization that handles the royalty pool. I'm just pointing to the most visible blanket representative of the music recording industry.
The New Licensing Agency would provide feedback to artists and recording companies about what songs are hot on the internet among file sharing services. The recording companies have an incentive to bring good music to market and to PROMOTE that music because that brings them a greater share of the license fees. Consumers purchase protection from the spot raids and outrageous legal actions we have seen in the past. The NLA would be open to even the smallest music distributor. If you are good at online marketing and can steer downloaders toward copies of your music, you get paid.
This gets rid of all the DRM craziness. I'd fork over 30 bucks (which is about double what I spend on CD's in a year) a year to have unlimited file sharing ability.
Imagine a return to the halcyon days of original Napster but without the legal risks. Servers that were fast, reliable, and (relatively) trustworthy. Nirvana for all.
I'm really interested in seeing if you can see any holes in this argument, I would love to read them.
-oakbox
Not just answers, the correct questions.
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.
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.
Mencken had it right. So glad that's old news.
This is interesting analysis, and the idea of double moral hazard, insurance, etc is a good way of looking at the sociological problem.
Actually, though, the article's writer doesn't seem to be aware that having an album streamed entirely over the net is becoming more the norm with every passing day. With that capability, consumers can make the purchasing decision without assuming much risk.
The bigger problems seems to be that the consumer doesn't want to spend the time previewing so many songs. In other words, the "mental transaction costs" outweigh the supposed benefits of finding new stuff.
I'm not saying that clearchannel radio is a good way to introduce consumers to new music. But it is an example of how consumers can have exposure to music without needing to expend mental transactions.
There needs to be a painless way to learn about and listen to new music. One such, solution, iRATE radio continuously downloads mp3's and lets users choose which one to keep and adapts to user preferences (see my interview with the creator Anthony Jones ).
I've already written a substantial essay advocating a voluntary compensation model for music (see sharethemusicday . )
In addition to tipping, content aggregators like Universal can provide value by simplifying the task of managing music files, improving the download client and allowing users to create "share lists" that are easily accessible. I would gladly pay for that.
If a content aggregator company could create a download client that simplified file management, allowing sharing of music lists and user recommendations and allowed for a tip jar, then everybody would be interested. Musicians could pay a small fee for music hosting (and maybe fan support like forums, web hosting, etc). They would do it if tipping became perceived as a reliable revenue source. Users could pay for the download client (plus access to updates). This kind of service would make money, satisfy fans who want unlimited downloads and satisfy musicians who want tips.
Robert Nagle, Idiotprogrammer, Houston