Chalk One Up For The Armchair Economists

from the getting-it-right dept

Mike Arrington, over at TechCrunch, has written up a post about "The Inevitable March of Recorded Music Towards Free" which will sound mighty familiar if you're a Techdirt reader. It's pretty much the same thing I've been saying for almost a dozen years at this point, pointing out the economics and inevitable trends facing the music industry -- and also noting why that isn't necessarily a bad thing. While he's dealing with emotional responses in the comments (again, that'll sound familiar...), it's more interesting to watch an "industry analyst" trash Arrington as an "armchair economist" without backing it up... and then getting his own economics totally screwed up. In this case, we need to chalk one up for the "armchair economists."

The analyst, David Card of Jupiter Research (the same analyst who incorrectly said that Radiohead's new offering would only work because the band was well known), dismisses Arrington's economics as "oversimplified analysis," but doesn't explain why it's actually wrong -- and that's because it's not. Card goes on to say that based on Arrington's analysis "software, filmed entertainment, soda at McDonalds, and the classic example, high-end perfume, should all be free," using that statement as a reason to dismiss the economics. But it's actually Card who's way off on the economics here. Like many of the folks who respond emotionally, Card seems to be confusing what he thinks Arrington is saying with what Arrington is actually saying. Specifically, he's confused "should" and "will." Neither Arrington nor I have been saying that music should be free -- but that it will be free based on the economics at play. People who read the "will" as "should" then get bogged down in moral arguments over "should" or "should not" that don't matter. You can say that companies "shouldn't" pollute, but it doesn't change the fact that they "will" pollute. At that point, whining that they shouldn't is meaningless -- you simply have to figure out how to deal with the reality that they will. If you can then take that reality and figure out ways for musicians to make even more money (as the economic research and history suggests is likely) than the whole moral issue goes away.

It's not worth going through each of Card's "examples," but if you look at the economic trends in play for each situation, you can see that Arrington is a lot closer to the mark than Card is. For software and filmed entertainment, the inevitable shift is to a service model rather than a product model (which is the same as music). A services model recognizes that the creation (not the distribution) of content is where the marginal costs are. In reality, they've always been services models -- just disguised as product models. In other words, the trends in both cases support Arrington, not Card. As for soda at McDonald's and high-end perfume, neither is a zero marginal cost good -- and both have a number of different economic factors dealing with them. For example, soda at McDonald's is a complementary good that people drastically overpay for as a convenience. There's value in convenience -- and since customers in McDonald's are a "captive market" for soda, there isn't the competitive market to drive the price down. It's too bad that a supposed industry expert would accuse Arrington of getting his economics wrong, and then clearly show both that he didn't understand Arrington's statements -- nor does he understand the economics of other products and trends. It reflects a lot better on the "armchair" economists than the supposed expert.

Disclosure: some might say that my company, Techdirt, competes with Card's employer with our Techdirt Insight Community. Then again, others might say that this blog competes with TechCrunch. Neither is directly true, but I might as well disclose rather than have to deal with it in the comments.

Filed Under: business models, economics, music industry

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  1. icon
    Mike (profile), 5 Oct 2007 @ 11:19am

    Re: Makes a point

    My main problem with your music for free rant is not that music is going to end up free, it is that you constantly talk about how artists can make even more money. You have never explained how they are going to make more money.

    Nope. I've never explained that at all. Other than the fact that I have. 070118/013310.shtml

    And there's a lot more from where that's coming from. If you want me to start citing the economic research (as I've done in the past), I can do that to. However, the simple fact is that in *every* industry, where the price of a specific resource drops, it tends to open up many more avenues to make money than in the past. This trend has been repeated over and over and over and over again. I've yet to find a significant counter example.

    I am assuming that if you actually knew, you would be consulting for the record industry a not writing a blog.

    You do realize this blog helps promote our corporate intelligence services, right? I wouldn't be so quick to assume that we don't have customers in the entertainment industry.

    Outside of live performance and trinkets like shirts and coffee mugs, how would they make money.

    Go read some of those other posts. There are lots of ways to make money. Live performances can be a big part of that, but they don't need to be.

    There are very few bands that are recognizable by name. It takes quite a bit of money to promote a band enought to get their name out.

    Yes, yes it does. But you know what's cheap? Giving away your music for free as a promotion. Go read the last link above about how you can use free music (especially as a no name) to start building up a following, and then leverage that to become much bigger.

    Word of mouth and a good following that would bring people in to my business will get them about $400 for 3 hours. In my opinion we will see fewer famos bands in the future.

    Sure, initially. But that's only the start, and it's no different than things are today. If bands start to learn how to use the tools available to keep promoting themselves, they can start to build up an even bigger following (assuming they're any good).

    In my opinion we will see fewer famos bands in the future. Many musicians will give up the low money bar gigs and get a real job, and some will just put mediocre produced music they made in their house for fun.

    Actually, we're seeing the exact opposite is starting to happen. More musicians than ever are making a living from their music, because they no longer have to get official record company approval to get a big enough following to make a living.

    Once people figure out that they will no longer even have a slim chance of making money in music by starting out as a garage band, their will be less and less music available.

    Again, the opposite is happening. More bands are making more music because it's easier than ever for a band to build up an initial following than ever before.

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