soulxtc
October 11th, 2007, 04:19 PM
Mike’s post on “The Inevitable March of Recorded Music Towards Free” (http://www.techcrunch.com/2007/10/04/the-inevitable-march-of-recorded-music-towards-free/) stirred up a lot of controversy and oddly confused analysis from places I didn’t expect.
Mike’s marginal cost argument isn’t so much that music should be priced at their marginal cost of production, but that they will inevitably have to price at that level. It’s the economic law of gravity powered by competition, be it from legal or illegal sources. Music labels used to have a monopoly over distribution, but digital distribution has ensured that’s no longer the case. I find Mike’s statement that “every consumer is also a potential producer of any song” particularly poignant.
Freakonomics, one of my favorite blogs, had a great roundup (http://freakonomics.blogs.nytimes.com/2007/09/20/whats-the-future-of-the-music-industry-a-freakonomics-quorum/) of opinions digital music a couple weeks ago. I don’t agree with all the opinions, but Koleman Strumpf (Harvard) has a great empirical analysis of the situation.
The counter-arguments I’ve seen don’t dispute the fall in price, but rather counter the fairness or un-sustainability of the business model. To that I say that “fairness” isn’t a business model. I’m also getting really tired of the starving artist meme. The industry makes all its money off of the big names that hit it big, but always points to artists that didn’t make it when they want to curry favor with the public. The fact is that most artists don’t make it in the current system, and still won’t in the new one. However, the new system will give artists a greater control over their destiny as they can run around labels and connect directly to consumers.
The un-sustainability argument mainly complains that the analysis doesn’t take into account average costs and fixed costs. But consumers and competitors don’t care what your cost structure is. They just care about how much they have to pay.
It’s the same issue technology firms confront. Once the IP is created, it costs nothing to proliferate. To ensure continued innovation, these companies are awarded patents to protect their works. But a similar system doesn’t make as much sense in the case of music. First of all, labels aren’t the root of the creativity, the artists are. Second of all, there’s not a compelling public interest in managing such a costly system. The RIAA is already seeing how much of a money pit that enforcement can be.
The music industry will have to search for natural ways of wooing consumers to their products in ways they can make revenue. Live and exclusive content make sense. However, there’s also the value of convenience that consumers will pay for. iTunes will still make money because it’s become a convenient destination for buying music online.
AllOfMP3 effectively charged for this convenience factor at their lower price point.
Labels are dead, long live artists.
Update: One of the counters to the claim that “labels are dead” is that they will simply transform. However, how much of a record company will they be if their chief business, making and distributing music, is taken from them. It’s their strangle-hold on distribution that makes them key, otherwise they serve more as marketing firms, a much more competitive area. Their inability to influence over Apple’s iTunes is a sign of their decreasing relevance as distributors.
Finally, saying music is going to die because labels are dying is like saying we’re seeing the end of reporting because some newspapers close down.
http://runningwithfoxes.com/2007/10/04/people-still-dont-get-webonomics/
Mike’s marginal cost argument isn’t so much that music should be priced at their marginal cost of production, but that they will inevitably have to price at that level. It’s the economic law of gravity powered by competition, be it from legal or illegal sources. Music labels used to have a monopoly over distribution, but digital distribution has ensured that’s no longer the case. I find Mike’s statement that “every consumer is also a potential producer of any song” particularly poignant.
Freakonomics, one of my favorite blogs, had a great roundup (http://freakonomics.blogs.nytimes.com/2007/09/20/whats-the-future-of-the-music-industry-a-freakonomics-quorum/) of opinions digital music a couple weeks ago. I don’t agree with all the opinions, but Koleman Strumpf (Harvard) has a great empirical analysis of the situation.
The counter-arguments I’ve seen don’t dispute the fall in price, but rather counter the fairness or un-sustainability of the business model. To that I say that “fairness” isn’t a business model. I’m also getting really tired of the starving artist meme. The industry makes all its money off of the big names that hit it big, but always points to artists that didn’t make it when they want to curry favor with the public. The fact is that most artists don’t make it in the current system, and still won’t in the new one. However, the new system will give artists a greater control over their destiny as they can run around labels and connect directly to consumers.
The un-sustainability argument mainly complains that the analysis doesn’t take into account average costs and fixed costs. But consumers and competitors don’t care what your cost structure is. They just care about how much they have to pay.
It’s the same issue technology firms confront. Once the IP is created, it costs nothing to proliferate. To ensure continued innovation, these companies are awarded patents to protect their works. But a similar system doesn’t make as much sense in the case of music. First of all, labels aren’t the root of the creativity, the artists are. Second of all, there’s not a compelling public interest in managing such a costly system. The RIAA is already seeing how much of a money pit that enforcement can be.
The music industry will have to search for natural ways of wooing consumers to their products in ways they can make revenue. Live and exclusive content make sense. However, there’s also the value of convenience that consumers will pay for. iTunes will still make money because it’s become a convenient destination for buying music online.
AllOfMP3 effectively charged for this convenience factor at their lower price point.
Labels are dead, long live artists.
Update: One of the counters to the claim that “labels are dead” is that they will simply transform. However, how much of a record company will they be if their chief business, making and distributing music, is taken from them. It’s their strangle-hold on distribution that makes them key, otherwise they serve more as marketing firms, a much more competitive area. Their inability to influence over Apple’s iTunes is a sign of their decreasing relevance as distributors.
Finally, saying music is going to die because labels are dying is like saying we’re seeing the end of reporting because some newspapers close down.
http://runningwithfoxes.com/2007/10/04/people-still-dont-get-webonomics/