Expert Witness: The economics of music and copyright law in the post-future

By John F. Sase
Gerard J. Senick, editor
Julie G. Sase, copy editor
William Gross, research

“The whole point of digital music is the risk-free grazing.”
—Cory Doctorow

Cory Efram Doctorow (born 17 July 1971), a Canadian-British blogger, journalist, and science fiction author, has served as the Boing Boing blog co-editor. As an activist, he favors the liberalization of Copyright Law. A proponent of the Creative Commons organization, he devotes time to expanding creative works available for others to build upon and legally share. Doctorow uses some of their licenses for his books. Some common themes of his work include digital rights management and sharing in an age of post-scarcity Economics.

The Creative Commons non-profit organization has devoted itself to expanding the range of creative works available to others for legally building upon and sharing. Doctorow prolifically writes about the apocalyptic changes facing Intellectual Property in general and the music industry in specific.

As a follow-up to our series on the business and law of music, we will explore the cataclysm facing the U.S. industry through the portal example of the music industry, a simple industry compared to those automobiles or energy. However, in the simplicity of this example, we may uncover some lessons that we apply to all sectors.

Free the Music!

In the web article, “The Inevitable March of Recorded Music Towards Free,” Michael Arrington told us that music CD sales continue to plummet alarmingly. “Artists like Prince and Nine Inch Nails are flouting their labels and either giving music away or telling their fans to steal it…. Radiohead, controlled no longer by their label, Capitol Records, put their new digital album on sale on the Internet for whatever price people want to pay for it.” As many others have iterated in recent years, Arrington reminds us that unless users can create practical legal, technical, or other artificial impediments to production, “simple economic theory dictates that the price of music [must] fall to zero as more ‘competitors’ (in this case, listeners who copy) enter the market.”

Unless sovereign governments that subscribe to the Universal Copyright Convention take drastic measures, such as the proposed mandatory music tax to prop up the industry, no economic or legal barriers exist to keep the price of recorded music from falling toward zero. In response, artists and labels will return to focusing on other revenue streams they can and will exploit. Specifically, these include live music, merchandise, and limited edition physical copies of their music.

Author Stephen J. Dubner states, “The smartest thing about the Rolling Stones under Jagger’s leadership is the band’s professional, corporate approach to touring. The economics of pop music include two main revenue streams: record sales and touring profits. Record sales are a) unpredictable and b) divided up among many parties. If you learn how to tour efficiently, the profits—including ticket sales and corporate sponsorship, t-shirt sales, etc.—can be staggering. You can essentially control how much you earn by adding more dates, whereas it’s hard to control how many records you sell.” (“Mick Jagger, Profit Maximizer,” Freakonomics Blog, 26 July 2007, http://freakonomics.blogs.nytimes.com).

To get a handle on the problems brought about by digital media in the music industry, we turn to the data most relied upon by the industry. This data comes through Neilsen SoundScan (http://en-us.nielsen.com), which operates a system for collecting information and tracking sales. Most relevant to the topic of this column, SoundScan provides the official method for tracking sales of music and music video products throughout the United States and Canada. The company collects weekly data and makes it available every Wednesday to subscribers from all facets of the music industry. These include executives of record companies, publishing firms, music retailers, independent promoters, film entertainment producers and distributors, and artist management companies. Because SoundScan provides the sales data used by Billboard, the leading trade magazine, to create its music charts, this role effectively makes SoundScan the official source of sales records in the music industry.

Quo Vadis? According to Neilsen Soundscan, “2009 music purchases in the U.S. were up 2.1% over 2008 figures, marking the second year in a row that sales exceeded 1.5B units sold according to Nielsen SoundScan.” However, according to its data, the growth driver for this record-breaking year was digital downloads, as music fans purchased 1.16 billion digital tracks (up 8.3% from the prior year) and 76.4 million digital albums (up 16.1%). Furthermore, re-mastered tracks from the Michael Jackson, Taylor Swift, and The Beatles catalogs fueled the overall sales growth. (“A Big Music Year for Jackson, Boyle, Swift, Digital Downloads ... and Vinyl?” 7 January 2010, blog.nielsen.com.)

As Al Tompkins of Poynter Online commented, “What does it say about music today that the best-selling albums 2009 did not consist of new music? Album sales dropped last year despite the ease with which fans can buy and download what they want. It was the eighth such drop in U.S. album sales in nine years. You can’t just blame it on the economy. Concert sales rose in 2009; so did movie ticket sales.” (“U.S. Album Sales Continue to Tumble,” 13 January 2010, www.poynter.org.)

Stephen J. Dubner sums up the mess quite well. “It strikes me as ironic that a new technology (digital music) may have accidentally forced record labels to abandon the status quo (releasing albums) and return to the past (selling singles). I sometimes think that the biggest mistake the record industry ever made was abandoning the pop single in the first place. Companies could force customers to buy albums to get the one or two songs they loved; how many albums can you say that you truly love, or love even 50% of the songs—10? 20? But now the people have spoken:  they want one song at a time, digitally please, maybe even free.” (“What’s the Future of the Music Industry? A Freakonomics
Quorum,” 20 September 2007, http://freakonomics.blogs.nytimes.com).

Like many of the attorneys I, Dr. Sase, serve, I have also worked as a musician/producer/engineer/indie label owner releasing esoterica since the 1960s. While occasionally making an adequate living off my music, I also developed my talents as an economist, earning a doctorate in that field. Therefore, I comment from this dual perspective of an economist/musician.

As many music pundits call it, the post-future does not differ much from the past. How and why folks obtain their music continues to reflect at least three related decision drivers. We can summarize the three most relevant as 1) Content, 2) Durability, and 3) Time-Cost. Let us explain further.

1) Content

When I started to record music in the early 1960s, record companies filled the market with “one-hit wonders.” It was the age of AM (amplitude modulation), DJ radio. It was also the age of the 45 RPM record with the hit on the A Side and usually some filler cut on the B Side. It was not uncommon for anyone with a 2-track reel-to-reel to “download” the one hit desired from their favorite radio station. Few groups offered entire twelve-inch LPs with mostly great songs. The first LP I purchased was Meet the Beatles by those four lads from Liverpool.

During the late 1960s, the industry turned to “Greatest Hit” collections by groups that had previously turned out a string of AM hits and to “concept” albums. During this golden age of LP sales, the Beatles, the Stones, the Grateful Dead, Yes, King Crimson, and numerous other groups released albums filled with solid content. Bottom line: consumers are okay with paying for products if they feel they are receiving value.

2) Durability

Why would someone buy a twelve-inch LP when they could borrow a copy and tape record the songs to a reel-to-reel or, later on, to a compact cassette? The answers at that time were simple. First, it was “cool” to have a great album collection, especially one that a member of the opposite gender could thumb through in one’s dorm room. Let us say that one’s album collection could inform another party about one’s tastes and possible sub-culture and personality. Therefore, an attractive array provided a certain degree of social currency.

The second part of the equation came from actual product durability. Like current downloads, self-recorded reel-to-reel and cassette tapes generally suffered from some loss of fidelity in the transition. More importantly, the integrity and permanence of the media also left fans with something less desirable. Thirty to forty years ago, the tape would flake, break, and tangle around the capstone. If one backed up their collection to a second-generation tape, s/he could recover one’s favorite tunes.

Today, computer hard drives crash. The same durability issues ensue without the expense of an additional hard drive and the time involved in making the transfer. What about CDs? As most of us who use CD-Rs for multiple purposes know, the technology that instantly burns an image leaves a product more delicate and subject to damage than a commercially fabricated CD stamped from a metal master.

3) Time-Cost

This third element reflects the old “tape is running/time-is-money” economic argument and may explain why younger music listeners prefer to download songs legally or illegally. It echoes the same economics that led listeners in the 1960s to record their favorite hits on the radio. The substance of the argument has to do with how an individual values their time. If music-lovers work for a low hourly wage (or often no income at all), they will value the time spent downloading, backing up, and transferring cuts in terms of what they could be earning during the same time. Let us consider the following example.

If we assume that twelve downloads or a comparable CD cost $24.00, a babysitter earning $12 per hour could spend as much as two hours ripping music to achieve the same value. However, someone with a skilled trade or a college degree may earn $48.00 or more per hour. Spending more than one-half hour at ripping would exceed the value derived. The counter-argument of the time-cost of traveling to a brick-and-mortar music store may get offset by a person’s ability to log on to Amazon or elsewhere in less than a minute and receive free shipping. The market will always change as the primary market demographic ages. It happened with the Baby Boomers of the 1960s and 1970s, and it will happen with Generation X, Y, and Z in the current century.

The bottom line of this debate rests in the fact that a consumer will choose the deliverable mode that optimizes their value bundle. This bundle includes quality and quantity of content, durability, and time-cost effectiveness. These remain the lessons that music makers and deliverers must understand to survive. The more things change, the more they stay the same.

“When I’m drivin’ in my car, And that man comes on the radio, He’s tellin’ me more and more, About some useless information, Supposed to fire my imagination; I can’t get no, oh no, no, no.”

—Michael Philip Jagger, British Economist,

London School of Economics

In conclusion, we recognize that specific values motivate consumers and businesses. These values include content, durability, and time cost. It does not matter whether the good or service under consideration exists in the form of real, personal, or intellectual property. The premise remains the same for making music, building automobiles, teaching economics, and providing legal services.

The British economist Adam Smith summarized this phenomenon 229 years ago in his concept of an invisible hand at work in the marketplace. In effect, markets work because all market participants seek to optimize their own self-interests. As long as both parties involved in a transaction perceive that they will emerge better off after consummating the transaction, they will participate. If one (or both parties) do not share this perception, no music, automobile, education, nor legal services will change hands. In effect, the market fails to produce a satisfactory outcome.    
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Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com).

Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com).

Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and edits copy (royaloakparentcoaching.com).