As far as I know, music by subscription services haven’t been very successful so far. These are services like Napster where you pay a monthly fee for unlimited access to an entire catalogue of songs. As long as you keep paying, you can keep listening as much as you want. I think there are two reasons why these haven’t taken off. One is that if you want to play the songs on a portable device, the device has to support whatever DRM the service is using, but iPods don’t support anything except Apple’s DRM, which Apple doesn’t let others use, and Apple doesn’t have a subscription service (yet …).
I think the other reason is that the target market isn’t quite big enough yet. Music by subscription should appeal strongly to people who are comfortable with digital music, and like to listen to a wide variety of songs, but for some reason don’t want to be involved with illegal file sharing. Almost every teenager these days is comfortable with digital music, but many of them are also quite comfortable with file sharing. Downloading music from P2P networks can be tedious and time-consuming, not to mention there’s the risk of getting sued. However, the average teenager has plenty of free time, and is probably not so worried about being sued.
However, fast-forward 15 years, and the teenager has a career, a good income, not much free time, and a reputation that he/she would like to protect. For this type of consumer there are considerable opportunity costs of illegal file sharing. Since these people are comfortable with digital music, I bet that at a reasonable price there would be quite a good demand for music by subscription. So as today’s teenagers and 20-somethings get a little older, I expect music by subscription to take off.
Related: Felix Salmon discusses a new phone from Nokia which gives free access to the Universal music catalogue for a year, and then reverts to a subscription service. Sounds like a very smart strategy to me, and timely too.
The tech blogosphere is abuzz with the news that Western Digital is selling a hard drive that prevents you from sharing files stored on it over P2P networks. It turns out that the drive’s hardware doesn’t do this, but it comes bundled with some software that does. Many techies are upset, saying that hard drives should not censor your data. On the other hand, to me it sounds like an interesting niche market. As they say in the article that I linked, it’s a perfect defense against a lawsuit from the MPAA or RIAA — I couldn’t have shared the files, my hard drive wouldn’t let me do it! It sounds like WD has been pretty smart to identify this niche market, and as long as enough users have preferences for unrestricted hard drives, I’m sure those types of drives will continue to be supplied.
Along similar lines as infidelity offsets, a new website called Music Donations allows you to appease your guilt about copying music by making donations directly to artists. As they say on their site:
You are still guilty of a crime whenever you copy, download or pirate music, but at least the artist receives money from your donation and you can feel better from making that donation to them.
A nice idea, maybe, but the way their system is set up at the moment suffers from a huge credibility problem — how do I know the money that I donate really gets passed on to the artist? It’s not like I can email Robbie Williams and ask him whether he received my five dollars. I guess an intermediary is useful, because it would be quite troublesome to find the necessary information to actually send five dollars to Robbie. So Music Donations can fill the gap by collecting this information and exploiting economies of scale in transaction costs. However, I’d be much happier if Robbie at least had a link to it from his site, or there was some way of auditing the donations, or something to make it more transparent. I don’t recommend using this service at all given the way it’s set up at the moment, because I’m highly suspicious that it’s actually a scam.
I came across an interview with a 9 year old girl (I presume American) about her thoughts and behaviour regarding file sharing on TorrentFreak, a blog about file sharing. Some of the interesting parts:
TF. Ok, so a bit like copying school work?….Hmm….ok, let’s talk about copying on the computer again. When you started using LimeWire, did anyone ever mention that if you did certain things you might be breaking some laws?
- Why would they put it [music] on the internet and invent mp3 players if it was against the law?
TF. Confusing isn’t it?….You mentioned you like Sean Kingstone - what if I told you that Sean Kingstone’s boss might send you a letter asking for money because you shared his album on LimeWire? What would you say to him?
- W.E! [whatever!]
TF. Come on, play along with me. What would you say if he did?
- I’d say “tooooo strict!” and anyway he can’t make me do anything. He’s not the boss of me, he’s the boss of Sean Kingstone.
TF. What do you think might happen if you didn’t pay him?
- Nothing. I’m too young to be charged by the government so he can’t charge me.
This video shows Trent Reznor (of Nine Inch Nails) encouraging his fans to steal (copy/download) his music (warning - contains swear words):
Actually, Trent isn’t the first musician to think of this idea, Robbie Williams thought of it back in 2003. It’s interesting for two reasons. First, why would a musician want to encourage fans to copy his CDs? Doesn’t he get royalties for each CD that sells? Second, as Trent observes, the price of CDs has not reduced over time. Why not?
The answer to the first question is that musicians have many other sources of revenue aside from selling CDs. You may notice that Trent is at a concert. Popular musicians can earn a lot of money from concerts, and the record label that sells their CDs typically doesn’t get any of that money. Taking into account other potential revenue sources such as merchandise and advertising, musicians have a greater incentive to make themselves popular than their record labels do, since all the labels care about is selling CDs. By encouraging people to copy his CDs or share MP3s, Trent will lose some royalties on those CDs, but he might become more popular, and more people will want to come to his concerts, driving up the price of concert tickets and earning more revenue for him. Thus the incentives of musicians and record labels aren’t always aligned with regards to encouraging or discouraging people to illegally copy music.
The answer to the second question of why CD prices haven’t changed is less clear. The introduction of file sharing networks represents a substitute good for legitimately purchased CDs. It’s reasonable to assume that this substitute is inferior — at the same price people would probably prefer the legitimate CD over an illegal download, and the quality of downloaded files can be variable. But the price is not the same, of course. Downloaded files are ‘free’ in that you do not have to pay for them, but CDs must be paid for. Although downloading is not competely free in the sense that there are opportunity costs — it takes time to find and download the appropriate files, it can expose your PC to viruses, and there’s the risk of being sued, among other things. Nevertheless, taking everything into account, at the prevailing price of CDs before file sharing became common, it seems safe to assume that some people will choose illegal downloads over CD purchases if the price of CDs remains unchanged.
One rational response of a record label to the introduction of this (albeit somewhat inferior) substitute to legitimate CDs is therefore to lower the price of CDs. This could help to offset some of the negative impact on its profits of the availability of illegal downloads. Of course, the label still suffers compared to when there was little piracy, but a price reduction can help to soften the impact by offsetting some of the demand reduction for CDs. However, it seems that CD prices have remained more or less constant over the past five years or so. What explains this? Are music labels stupid or evil? One possible explanation is that instead of cutting their own price, labels have been trying to raise the ‘price’ of the substitute illegal downloads by suing people who share files. This raises the perceived price of downloading and makes it less attractive, which can be an alternative strategy instead of cutting the price of CDs. The second possible explanation is that labels have been ‘entering’ the substitute market, through selling legitimate downloads such as through Apple’s iTunes service. This will help them to capture some sales from some consumers who would have chosen illegal downloads if there was only a choice between illegal downloads and legitimate CDs.
So there are plausible legitimate strategies that music labels may be following to respond to the invention of file sharing networks without lowering the price of CDs. As an economist I like to believe in these rational explanations. However, a part of me can’t help thinking that it may also be due to stubbornness on the part of music label executives to recognise that file sharing is now part of the business environment that they operate in, and that they should respond to that optimally.
