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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.
2 Comments
Actually, he is in Australia and the price of CDs there seems to have been rocketing up for the past year. Foreign exchange rate could explain some of that; there has been some experiments here in Europe (where the foreign exchange trends when the other way) to lower the price of CDs.
I would like to insist on your first point: my Ph.D. advisor was commissioned by the Ministry for Cultural affairs in France to consider the case; I don’t think his report is public yet — and the system here is very peculiar with most of the subsidies going through a job insurance scheme — but I remember proof-reading a draft where the share of CD sales in artists’ revenue was insignificant for 99% of them. The remaining margin was mostly big stars who used it to employ (and a few shy artists). Producers make most of their money though CDs (this might explain the “Stealing” rhetoric), but also song-writers, though they get a fair share of public hearing too (radio & bars).
This structure is little known, and still very obscure (it took months of efforts with full access to the data to sort out a fraction of the real flow of cash) and not about to simplify: iTunes, ringtones anyone? And think about splicing eMusic revenue by activity or SpiralFrog ad-targeting externalities; call-back tones & MySpace pimping could be simpler though. Apparently, not a cent from the ringtones mana ends up in artists’ pocket.
Economist don’t talk about fairness, so it would be inappropriate to comment on that — but incentives is surely relevant here. CDs are still a key way to share music, but less efficient then offering MP3 obtained from P2P networks — so what are the artists incentive, whether they live for fame or concert attendance (the same thing, mostly)? Encourage not “stealing”, but the most efficient way to share, to maximize the word-of-mouth: hassle-free technology. Artists would be far less likely to encourage any illegal system if the legit way was more convenient.
Another way to rationally explain the rise of CD prices since the introduction of piracy is to consider different type of consumption, and an increasing share of the population with access to piracy. Even if the figures haven’t change much, those with full hard-drives probably download less and spend more time helping late adopters; increasing quality, meta-information, ease-of-use, diversity encourage more people to steal; so does the impression that is has become an established practice: youngsters never though of doing otherwise — except in one case: you do not offer (for birthdays, or at Christmas) stolen tracks. Well, some do — but the “box” is still the default socially accepted form. Even if the prices have been up. So I’m assuming a price hike can be interpreted as a differentiating market — like for PhotoShop: used to be one price, but with a “beginners” and a “pro” edition, Adobe can shave the added value with a closer knife. Stealing became a de-facto lower market; legit had to be First class, therefore more expensive.
I prefer to think that marketing execs know about vertical differentiation rather then occupy leading positions because they are greedy and stupid, or just narrow-minded. I can be wrong.
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