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 @ 1:55pm

    Re: Re: Re:

    You are confused by thinking that music used as promotion is a free product - the cost of the music needs to be accounted and measured against the benefit of the promotion, and if it's not cost effective it will be dumped (you also have to understand music is no longer the product - it's just promotion).

    No, we agree here. Obviously the cost of *creating* the music needs to be accounted for, but recognize that the ongoing cost of distributing that music is now free once created.

    To achieve your goal there is need for expertise on how to make music somewhat similar to what the current industry makes (and musicians want to make) but which can fairly reliably and effectively be used as promotion (or some other "free" use) - this does not yet exist.

    I'd argue not only does this exist, it has always existed. Most musicians don't start out signed to record labels, you know. They start out playing music (and sometimes recording music) for free, hoping to use it to promote themselves to get to the next level.

    What we're saying is that such a next level is more easily achievable if you don't go through the traditional routes.

    It's clear that no-one has a grip since all the bands who are trying new things are all trying different things and all having wildly different results.

    You are wrong to think that all bands need to employ the same business model. In fact, part of the point is that there are so many different available business models now (as opposed to before).

    The old model is still the best so it's obivous why the industry is protecting it - they won't stop until someone gets a good grip on the new environment.

    No, the old model is the *easiest* but not the best -- and it's been getting harder and harder for it to work. That's the point. As more bands figure out these new models, it gets harder and harder for the old model to keep working.

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