Asymmetrical Information

A lot of hand-wringing there, but not much economics. If what you say about no-one writing but for money is true, you wouldn't write this blog, and the web wouldn't exist. Easy copying of text has been possible for longer than music, and it hasn't destroyed the publishing industry, it has complemented it. The same should be true for music.

Rather than hand-wring about this, I've been mapping out a market-based model to provide a new solution to the payment problem. It's at http://mediagora.com. Do please read it.

As for gatekeeping, consider how you find articles and weblogs to read -through chains of recommnedations. That works for music too. My model has a way to reward promotion of this sort too.

Kevin, that's a poor comparison. Most blogs worth reading, from Instantman to Scrappleface to Megan's, are punditry, highly dependent upon original material received from paid journalists and pundits. Without those sources, Megan would be limited to writing about her dog and her abortive Atkins diet, which I wouldn't find nearly as interesting as, say, the entry under discussion now.

Artists do not need the record labels to make a living. Maybe to live in NYC they do, but down here in Texas I can name off dozens of musicians that make a living, if not a great one, without being signed. Many of them have no plans to get signed.

I can guarantee no matter what happens Adam Duritz and Rob Thomas won't be working 9-5s any time soon. Nor will the next generation of them. They certainly won't be as well off (as you mentioned they would lose serious concert money and promotions), but they'll still be around.

I also don't see the home recording stuff getting more expensive. I see new innovations coming at a much slower rate, but I think the technology is widely licensed enough that the selling rate is not heavily subsidized by the big studios anymore.

Now, what will get lost is the filtering process you talk about. Ironically, it's the afficianados that will be least hurt by this. We're also the ones that are the backbone of the industry. The toking college students from your previous article that are the ones doing most of the damage (by just swapping and not buying) will be the ones hurt the most cause they're going to have to get off their rear ends.

But really I haven't seen anything in here that justifies (in my mind, anyway) the belief that the collapsing industry is the fault of the file-swappers.

I agree with you that copyrights are important and am frustrated to no end with the entire "music should be free" crowd, but that cuts both ways and I think the recording industry has done itself a lot more damage than has Napster.

E, What I said was the blogs were complementary to pre-existing text distribution models. Music could follow this path too, and there are some signs that it will.
I read lots of blogs that aren't punditry based on other news, but are examinations of deeper issues. They are not replacements for newspapers, though I imagine they undermine the Op-ed pages a bit.

Maybe my experience with file sharing is atypical, but it does provide support for the concept that file-sharing 'might' help the record companies in certain instances.

I had extensive experience with NAPSTER and continue to have extensive experience with other utilities. I use file sharing for 3 purposes. First, I download songs which are out of print. I'm not an economist, but I don't think that this is damaging. Second I download songs from new artists when I have heard their songs on the radio. If I find 2 or more songs that I like, I buy the album. I do this because I HATE hearing a song on the radio and finding out that it is completely unrepresentative of the artist's music. These purchases (about 40 in the past 2 years) are purchases which I would not have made without the ability to test out the artist's music first. Third, I download 'remixes' of interesting songs. In almost every case, I own an album with the original song.

Once again it is possible that my case is atypical, but if it were typical (or even just a large percentage of file downloaders) would this be economically positive?

I think that the empirical question is: "Do the downloads typically represent sales which would otherwise be made?" If the answer is yes, then there is a 'Tragedy of the Commons' situation. If the answer is no, then other questions become important: "Do the downloads generate more sales then they remove? Do the downloads generate sales in other area of the economy which allow the producer of music to maintain a profit?" I'm not sure that your posts answer these questions.

I'd have to interject here about e-books and the death of book publishing. Bean Books publishes a lot of various sci-fi authors (Flint, Drake, Weber, Ringo, and Bujold to name a few). In the introduction to the free library that Baen set up, Eric Flint he could care less about online piracy of his works (or words to that effect) and Jim Baen, the owner of Baen books, agreed. The library is the result, where authors can offer their works up for free download. Apparently, most of the works that have been put up have shown subsequent surges in sales. In addition, many of the authors have seen sales all their works increase. Baen is fairly happy.

Yes, yes, if they are putting up signs saying "Hey, its free! Take one!" then its technically not piracy. It is the same basic premise, though, as piracy, in that the downloader is getting the book for free in various electronic formats.

However, I am leery of applying this to the music industry, as the differences between an e-book and a print book are somewhat more significant than between an mp3 and a CD.

I draw two conclusions from the discussion on this and Jane's previous posts:

1. Jane and others have the best of the argument about the moral/property rights issues involved in downloading. Arguments to the contrary basically amount to "But the bastards deserve it," which may be true but doesn't change the nature of what is being done to them (unlicensed exploitation of their intellectual property).

2. A whole lot of people believe otherwise and will continue downloading music.

So what's the solution? Is there any feasible legal change that would resolve these problems without going to the absurd extremes demanded by the record companies? I basically buy Jane's analysis of the rights and wrongs, but I also buy the contention that the record companies are run by scary people who are out to destroy legitimate fair use and gain a ridiculous amount of power over how even us non-downloading sorts use our computers. So what do we do? For the moment, the downloaders scare me a lot less than the record companies do.

Easy copying of text has been possible for longer than music

Not only has "easy copying of text" not been possible for longer than music -- it still, to this day, isn't possible. Photocopying a book costs about as much as the book itself, is time-consuming, damages the original copy and isn't as convenient to read. Scanning the book and reading it that way is, again, time-consuming, and the end result is less pleasant to read. The only text that can be conveniently copied is text that's already in electronic form, and eBooks/eArticles are not a good revenue source for anybody.

In contrast, copying a CD takes a few minutes and a few mouse clicks, and a fifty-cent blank CD. And the copy is every bit as good as the original. There is no parallel to that in writing.

Market power will probably not accrue to DJs, venue owners, or equipment makers if it exits from labels, because barriers to entry in all those venues is pretty low (and supply is fairly elastic). Economic surplus will mostly go to consumers (and yes, it won't help artists get rich).

Moreover, labels are not technology companies. None of the improvements in recording come from labels -- they all come from the computer industry through software and hardware improvements. Content industries in general have rarely innovative, and mostly try to block new technology, especially when in threatens their *real* scarce resource which is distribution channels.

For a blogger, jane, I think you underestimate the ability and interest in music consumers backward integrating into production. And music consumers are a *much* bigger market for software and equipment suppliers (usually Intel and Dell) than labels ever were.

File sharing is not harmless, nor is software piracy. But the record companies and the software companies ignore the fact that a large percentag of the pirated material is in the hands of people who would NEVER have purchased this material if that were thier only option.

I have downloaded a LOT of "free" music. Anything that I actually liked, enjoyed listening too, wanted to hear again, I went out and bought.

I have many hundreds of vinyl albums (yes, I'm old) that I never listened to more than 2 or 3 times. Quite a few of them I listened to only once. I learned my lesson. I will not buy a CD until I have heard it at least once and made sure that it is worth owning. File sharing makes that possible.

They record companies are crying about lost profits, but the profits they have ACTUALLY lost are miniscule.

This doesn't answer the question of legality, of course. :) Note, however, that it won't be file sharing that drives the record companies out of business, it will be thier excessive greed coming back to bite them in the ass.

Thier treatment of the artists is so shabby, and becoming so well known, that the laws that allow this sort of thing are bound to change in the not too distant future. That is where thier real problem is.

Very few texts published these days are not in electronic form beforehand, so I fail to see the distinction. I read books on computers, and paper books too. I've read Cory Doctorow's next two novels purely in digital form. There are services that will take a pdf file and print and bind it for you by return.
Brewster Kahle's Internet Bookmobile showed the viability of print on demand. The Baen books site is agood example too - I read some short stories there, and bought 4 books as a result.

I disagree, Zimran. First of all, by DJ's I meant radio DJ's, and the barriers to entry to that business are damn near impassible right now. . . little hard to walk in off the street, get a federal license and set up shop. Similarly, barriers to entry in venues are not as low as you think. If you want to set up a venue in Manhattan, you need at minimum several years lead time, an expensive lease, a whole lot of licenses, including cabaret licenses, decor, employees, and booze. If you want to be a hot venue, you need much more than that in the way of publicity and connections, not to mention good real estate. If you want to be an artist, on the other hand, you need. . . a guitar, and possibly, the ability to carry a tune. Market power accrues to the item in shorter supply. Bars that play music are not all that numerous in big markets like New York, Boston, Chicago, Philadelphia, LA, San Francisco -- at least, not relative to the number of people who want to play music.

Hot venues that can charge a premium price will pocket the premium now that the record labels aren't leaning on them. Non-hot venues that can't charge a premium price will pocket what premium exists in the form of drink and bar food sales. If you've ever been in a band, you know that you spend a lot of time playing for chicken fingers and beer, even when you've got something of a following.

I won't even talk about large venues. . . I think it's safe to say, without a national label pushing their name, a band needs Shea Stadium a lot more than Shea Stadium needs the band. Although I doubt that, in the absence of the label promotion, you could get enough of a crowd to fill a stadium at prices that would cover the stadium's costs.

I agree that some of the current surplus will go back to the consumers. But I think a lot of it will go to hot real estate owners and radio stations in big markets. I think very little of it will go to the artists; there are just too many people who want to be performers.

I also think it's interesting that people are saying "I just listen to it so I won't buy an album I don't like"

Don't you think people buying an album they don't like to get the one song they did like made up some significant fraction of record company sales? I mean, given how many of us could probably dig out a dozen such albums from our own collections?

Mind, I'm not saying that record companies have some sort of right to those sales. But there's a reason that they don't want people "previewing" their albums. And in doing so, you are violating their legal property rights, no matter how you spin it.

I don't think anyone here is seriously arguing the legality of downloading music you don't already own. However, they are questioning the assertion that it is the profit losses caused by piracy in and of themselves that is going to drive the recording industry into the ground.

Yes, there is no justification that makes downloading files you have to usage rights legal. All the "I'm only previewing" arguments don't change that fact. What they change is the question of actual financial damage to the record company. Significant financial damage only occurs if files are downloaded in lieu of an actual purchase.

The point is that if you are previewing for the purpose of avoiding crap you otherwise would have bought, you are costing the record labels money.

And there are lots of people arguing that it's okay to download music you don't already own because. . . well, the record companies are mean. And anyway intellectual property isn't real property. Or something.

"I think the hobbyists will find that the innovation in equipment and software will cease..."

I don't think that innovation in software is going to go away if the music companies die off. If nothing else, the death of the music companies would mean that they couldn't keep trying to buy passage of the CBDTPA through Congress. Words cannot describe the joy with which I and other people who use open-source software in our day jobs contemplate that prospect.

What does look likely is that the music companies will have to be, in essence, reinvented to do the things that you correctly point out they do usefully -- namely, serve as gatekeepers for some standard of quality and allow consumers to have some sort of shared body of music that they can enjoy together.

But it doesn't follow from that, that the *current* music companies are going to survive or that they should survive. Remember, they could be trying to reinvent themselves *now*, but what they've instead tried to do is make me a felon for doing bioinformatics on a Linux box. This is like dinosaurs trying to solve their problems by outlawing fur.

I think they'll have to die so that they can be born again. It's kind of Orphic and mystical. ;)

Jane, I think you're confusing different people's arguments, and missing a lot of back story.

'Intellectual property' is not the same as real property. It is a state-conferred monopoly right with an expiration time (though the latter has become notional due to legislative capture by rent-seekers).

Pretending an equivalence between physical goods and expression of ideas is missing a lot of subtlety. Attempts to pass laws outlawing computers, or allowing arbitrary searches and seizures of them to defend these state-licensed monopolies are underway. These laws as draftedwould violate the first, fourth and fifth amendments to the constitution.

Does saying this mean I condone people copying others creations without payment? No.

I firmly believe that the asnwers to this impasse lie not in legislation, or even in technology, but in creative economics - creating incentives for behaviour that we want to encourage. See http://mediagora.com for more

Good find by Kevin on the paper by Stan Liebowitz.

http://wwwpub.utdallas.edu/~liebowit/knowledge_goods/records.pdf

The title of which is: "Record Sales, MP3 downloads, and the Annihilation Hypothesis"

Here's his conclusion after 30 pages of very thorough and honest economic analysis:

My own views, which are outside the realm of economics, are that record companies should be
allowed to engage in moral suasion, and to make life difficult for MP3 downloaders. Actions such as
putting phony MP3 files on peer-to-peer networks (such pretend MP3s are known as ‘spoofs’) increase
the costs of MP3 downloading but do no other harm. Record companies, in my opinion, should be
allowed to put copy protection or anti-ripping devices on their discs if they wish (although they need to
realize that consumers will derive less value from such discs and wouldn’t be willing to pay as
much).

Digital rights management technologies are also, in my opinion, a good idea.

I would allow the record companies to prosecute MP3 downloaders for copyright violations at
their own expense. I am doubtful that juries will deliver stiff penalties for any but the most egregious
downloaders. I view this as a costly and not terribly inviting road for the recording industry, but one
they should be allowed to take in defense of their product. If this were somehow turned into a war
against downloading, akin to the government’s war against drugs, with funding and support from the
government, I would probably change my mind. I see no reason to criminalize a large portion of
today’s youth for downloading MP3 files.

But I would also draw the line at exempting record companies from laws that prevent third
parties from tampering with the computers of others, whether they are MP3 downloaders or not. The
harm brought about by MP3 downloading does not seem sufficiently great to warrant such a bold
exception to rules that are otherwise held in great esteem.
---------endquote--------->>

I write software for a living, and I can say with assurance that intellectual property isn't real property. Feel free to quote me.

Now, that doesn't mean that we can't or shouldn't engage in contract on the basis of intellectual expenditure. But the model for doing so is perforce going to be different than the model of "property," which of necessity encapsulates a notion of scarcity. The question regarding matter-replication, particularly in light of recent advances in quantum teleportation, is well-framed: what happens to even the most "obvious" property-based business models when the marginal cost of replicating physical objects approaches zero?

The only realistic answer I've come up with so far is: war.

Jane, at that point you have to consider things net. That is, if I preview something that I would have bought and decide it's crap, they lose a sale. If I preview something I wouldn't have bought and decide I like it, they've gained a sale. Personally, I default to not buying, so its generally a net gain for them from me.

the record companies are the cause of some of their problems, because they've gotten themselves locked into a format, rather than focusing on their core business: distributing music. Jane, for the pricing if we backout distribution and cuts for the retailerm there should be significant savings to be made by using digital distribution.

companies could still make a very good income, but it's the classic compaq scenario: your current business model suckas and is failing, and new business model exists, but switching to it will lead to a ramp-up in revenues, while also pretty much cut off the current income stream... losses in the medium term = no change in strategy... unfortunately!

and i agree with the posters here as to what the effects of downloading are on companies. It's very wrong (yet i know many who do it) but if there would be no sale in the zero condition, then you lose the required element for theft... also, for sony, it is likely taht mp3s are net benefit, given the weighting of margins from the consumer electronics business must be assigned to mp3s, offsetting the losses of sony music...

>>"I also think it's interesting that people are saying "I just listen to it so I won't buy an album I don't like"

Don't you think people buying an album they don't like to get the one song they did like made up some significant fraction of record company sales?"

Sure. So what? My heart does not bleed for the record companies lack of capability of squeezing that last drop of blood out of the consumer.

Before file sharing, we borrowed albums, or taped them. I stopped buying albums for ONE SONG in 1973.

I myself have fallen for the trap of buying a CD for one song at least three times. I'm sorry kids, but 54 bucks for 3 songs is just too damn much. For years I just stopped buying tapes and discs, I had a choice of spending the money or doing without the music...I chose to do without the music.

When file sharing became available I was overjoyed...not only was I able to get rare, obscure songs from my high school days, I could get them for free!

I know that I should act like Ned Flanders and be morally outraged by this and rage against the sneaky Petes who are depriving record executives of their money for cocaine, hookers and Ferraris with their dastardly crooked ways...but guess what...I ain't doing it.

Call me a thieving bastard, I don't care.

I do download music and one of the reasons I do that is to preview music as some have said above. This helps avoid buying a CD that has one good song and the rest is filled with crap. Jane has said that this amounts to theft as you are depriving the record label of a sale by finding out that the CD is crap beforehand by downloading the material illegally.

Let's grant the point that downloading is illegal. However, have none of you been to a CD store where they will let you preview any CD in their stock before buying? I have. Tower Records is one, but many chains offer this service. So there are methods of discerning whether or not a CD is crap or not before buying outside of downloading. Downloading just saves me a trip to the store. So downloading is not granting me any powers I didn't already have before it existed. So the record company is NOT in fact, losing any sales due to my screening methods. The gasoline stations in my area are suffering a loss of a few dollars I suppose.

A side point. Can one not make the argument that by releasing a song that is completely unlike the rest of the CD, that the labels are misleading the consumer? I wouldn't call it fraud, that's too harsh. But it's definitely misleading.

>>Jane, at that point you have to consider things net. That is, if I preview something that I would have bought and decide it's crap, they lose a sale.

I agree with Chris. Also, most people do not have a completely open-ended budget for buying CDs. If someone saves money by not being duped into buying a crappy CD, they will be more likely to buy another CD that they decide they like.

I think it's outrageous to attempt to sell me a CD without letting me thoroughly examine it. Nobody walks into an auction house and buys a painting draped in a velvet cloth. Similarly, I'm not about to buy a CD without having heard it (unless I am thoroughly committed to the musicians who have made it).

P2P networks are excellent resources not only for previewing, but also for exposure to music that is generally not commercially available. There are a variety of foreign & niche bands whose music I can't get in any record stores.

Jane,

Just wanted to say that I appreciate your arguements, and do feel the price of content creation is not getting enough "play" in college dormitories. If you believe that music piracy is without consequence, consider China, where piracy is so prevalent that the music infrastructure has collapsed. Pop musicians no longer produce albums to generate revenue, but use music only to generate an image, which they then sell for advertising. Consider how close this is to what Brittany Spears does, or in a parallel sense, what Michael Jordan did with a basketball. It can be argued that the musical quality dimishes somewhat in the presence of constant "Kentucky Fried Chicken" refrains.

That part I agree with, but like many others, I will testify that I used mp3's either for evaluation, or because of the singularity of a particular song. Approximately 90% of the time I liked an artist, I purchased their CD's. I admit this is in small part because the virtues of the very expensive stereo systems I own are negated by low-bandwidth recordings. I stopped using free downloads basically after napster ended, and my CD purchased - and I'm not exagerating - sharply declined.

I am happy to report that eMusic has essentially replaced this function for me. For a flat rate, I am able to download a large selection of back-catalog music, and my experimentation has returned.

Two other points: 1) I'm not sure how much the recording industry drove recording technology, but I don't think it was a lot. The advent of cheap home studios is a consequence of Moore's law more than anything Time-Warner did. The value of the studios isn't in developing technology to record analog signals, but in creating an acousticly good recording environment, placing the correct type of microphones in the right spots, and mixing the different tracks together to create a finished project, all of which requires a certain expertise to pull off well. With the advent of 200 Gb hard drives, the technology of recording bits is trivial. Adding them together in a drag'n'drop way isn't any harder. It was the infrastructure of people trained to run the equipment properly is what the music industry has provided. The amount of money spent on recording equipment in the past doesn't need to be spent today because you can buy a 200 GB hard drive. And that is much more IBM putting giant magnetoresistance to work than anything any recording label did.

But this is somewhat moot since 2), the recording labels have been doing a terrible job of recording songs. This isn't just us freaky audiophiles, and this isn't just the punk bands, Albums are deliberately made poorly, for whatever reasons, but this essentially negates the experience of the professional recorder.

Last but not least, I am bothered by the extent old catalogs which go unpublished, and which leave irreplacable recordings to rot in basement vaults. What's to be done in the case of ownership that would rather let it rot than allow it to be preserved digitally?

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