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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.
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.
"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
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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
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 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.
"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
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?
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.