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 @ 1:12pm

    Re:

    Yeah, probably so. I'm a musician and not a bid'ness man.

    And a pretty good one too. I checked out your site. I was recently marveling musician I know (as an acquaintance, not well) who has been doing some "one man band" stuff (despite a modest success as part of a larger band) and it's pretty impressive in the first place -- and to do it well...

    Anyway, I actually think your point above is what the record labels should be focusing on. You're a musician, not a marketer -- and record labels are the opposite. If they just learned to embrace the tools and the trends that are out there, the end result could be something special...

    Sometime in the future. For right now, nobody knows what the hell is going to happen or what the new model will be, and most musicians haven't a clue how to make things work in the present environment.

    The thing is, I don't think it really needs to be in the future. I think there's a lot of noise out there, but some are figuring it out and doing a pretty good job of it.

    My main point, again, is that gas costs have skyrocketed while bands are still getting paid the same amount for a show, and that most musicians I know don't make any money touring (Yeah, yeah, I know - boo hoo!), so people should just think about that for a minute before being so sure they have this new music business model completely figured out and getting on bands/artists cases for not being KISS...

    Gotcha. And on my side, I should be clear that I never meant to imply that it's "easy" to make money. But, then again, it's never been easy to make money as a musician -- but there certainly are more opportunities to do so today than in the past. While gas prices are a good point, it seems like there are many other avenues for making money beyond touring...

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