Speaking Out

Clear Channel is always referred to as, you know, this great Satan, or the worst example of this. They've done nothing different from what other businesses would do given the state of their industry, what the FCC deregulation of the industry has said, that you are allowed to own thousands of radio stations if you want to. I mean, it makes sense that a businessman would say, "Well, let's do it. And then let's use our clout to make even more money." I think it's a bit of a red herring when people say that the music industry is all screwed up; it's Clear Channel and all this kind of thing. It's actually the way business is done in America that's kind of messed up. Because this is not unique to the music industry. I mean, look at the pharmaceutical industry and how business is done in that industry with free samples and holidays and going to doctors and all this kind -- I mean, this is how business is done in America today. It's not just the music industry. So it shouldn't surprise us. So why are we surprised? I don't know why we're surprised. I guess most people don't take too much notice of this stuff. You know, we all go about our lives. Everybody has got their lives to lead. We have to worry about paying the bills, the mortgage and getting the kids out of the house in the morning. Now, people are not worried about how the music industry is squeezing independent artists out of getting airplay. But, it's only when we think back and we say to ourselves, "my God, for 30 years I've been listening to the Rolling Stones and Elton John and Madonna and The Beatles. And 30 years from now what am I going to be listening to, because I can't find anything I like on the radio?" I mean, maybe that's when you suddenly say to yourself, maybe this matters. Well, maybe if you're our age, you're thinking that. But, if you're 20 you're not thinking that, because you weren't there when that golden era of FM radio was there and independent music did get heard, and record labels signed artists that actually expected it to take three albums before they brought them in. We know that because we were perhaps around then. But the younger generation of music listeners is not aware of that stuff. This stuff is not a surprise to them. Does it matter? Sure, it matters. It matters because in a society where artists are squeezed out of being heard or seen, whether it's in music or any other art form, then you're really not getting a challenge to the status quo. So, if music is being made by an independent artist, but is not being heard, then things are not going to change. There's no challenge to the accepted norm. And that's really what the artists are for, and that's the role that they play throughout history. …

what do you have to say on this topic

Clear Channel controls the vast majority of the radio stations in the country. By any normal standards it's a monopoly. So instead of having lots of program directors, and maybe the guy in Philadelphia is a little crazy and he'll play a record nobody else will play, and people start hearing it, and requesting it, and the record takes off by itself. No more. Clear Channel is in control. If they don't want it played, it doesn't get played. The public doesn't get a chance to call in and vote, and speak. So now if you can't get through Clear Channel, or you can't get through MTV, how does anybody know your record is out?

Opinion made about the music industry

There's essentially, I don't know, two or three radio stations for all intents and purposes right now, which limits the ability of music, different music, to get out there. Program lists are being devised on an almost national basis for certain kinds of formats. The independent thinker as used to exist in the radio station is no longer allowed to exist. In the early days of the music business, the record business, you could find a DJ in Cleveland, like Alan Fried, or in Buffalo, who would fall in love with a record, start playing it, people would react to it, and you could start a record off that way. It's much more difficult to do now with two or three conglomerates controlling all the radio formats. These problems beget their own solutions. Satellite radio may end up being what radio is about. Pirate radio has been a result of the consolidation of radio stations. And the lack of power of radio really, in terms of affecting people's lives, is a result of its dumbing down to a bland, one-dimensional approach to music.

the way the music industry die

The radio business, in the early '90s, had really started to suffer. There were lots of stations that were doing poorly financially, and the broadcast lobby, which is a very powerful lobby in Washington, successfully lobbied Congress to raise the limits on station ownership. So, whereas before a company would be limited to owning roughly 40 stations nationwide, when this 1996 legislation was passed, there was suddenly no limit of what you could [own]. Thousands of radio stations changed hands and companies that wanted to really get on radio were able to pull up some enormous multi-billion dollar mergers. And suddenly a company that once owned three-dozen stations could suddenly own a thousand. And so you just had forces emerge that couldn't have legally existed before because of this change, and that's really revolutionized the music business. The effect has been? ... All of a sudden you have these companies emerge where they controlled every station in that city or they controlled a small station that you used to be able to hold sway over. But they also have a huge station that held sway over you, and they can use that to leverage the record companies. So, the bounds of power really shifted toward the radio conglomerates. And this idea of 20-song playlists, you're talking about a funnel being narrowed? Right. I think it's difficult to measure exactly what the effect on playlists has been. But, I think there's statistics that show at least at the top of the playlist, there are fewer new songs that are getting the heaviest rotations. So what you're seeing is essentially a trend where in most radio formats there's a small number of songs that get played over and over and over again. And the number of songs that get that opportunity has definitely shrunk. And so if you are someone who believes, as a lot of record executives do, that radio is the most powerful promotional tool that you have, and a big part of your week is spent trying to get spins on radio stations, that's a big problem. Because now you've got few opportunities to get into that pipeline where exposures would seem to translate to record sales.

Fixing the Business Model

What we’ve discovered so far are two critical things: First, the implicit contract between the principals and the agents in the music market, far from creating the right incentives, in fact produces a moral hazard – because it doesn’t take into account problems in monitoring the record industry. Second, technology has allowed music listeners to take matter into their own hands, creating a double moral hazard.

Does understanding this help solve the record industry’s problems? Yes – in a major way. If the record labels can’t resolve the information asymmetries that let it operate under extreme moral hazard, and that cause listeners to retaliate with their own moral hazard, it should do exactly what these economics suggest: provide listeners with insurance. Of course, it would be better if the industry could resolve these information asymmetries, but I’ll leave that for another time.

How can the record industry offer insurance without creating a double moral hazard? The surest way is to offer a subscription service instead of charging for discrete bits of music. Otherwise, it might offer limited guarantees – the opportunity, for example, to sample any song in it’s catalogue an unlimited number of times, but to only download it once. It’s important to note that low quality 30-second snippets don’t really cut it – they most likely don’t provide enough information to ensure to consumers that the industry is doing it’s job.

But the simplest way might be to actually offer insurance – just like the standard model of the insurance industry. That is, for a fee (the deductible), offer consumers the ability to sell their risk of buying music they don’t prefer. For example, users might pay $20 a year, for the ability to return a certain amount of music.

Another way is to offer listeners a contingent contract. Contingent contracts are where payment is dependent on some property of a good, like quality. You sell a contingent contract every time you order from Domino’s: if it’s not there in 30 minutes, your pizza’s free. The points is that these contracts offer another form of insurance, by matching quality to price – and so create the incentive for agents that are also good for principals. Because they make up for quality slip-ups, contingent contracts help sell goods when quality is uncertain, by reducing risk. It’s difficult to see how this can apply to information goods like music – since the price is paid before the quality is discovered. But there are innovative ways to do so. For example, shipping companies offer rebates when they deliver late. Similarly, the music industry might offer rebates when the aggregate sales of a top singer’s latest album are less than expected.

A third way is to offer multilateral contracts, which offer the potential for risk-sharing among listeners. Multilateral contracts are made by one party, with many parties – but, crucially, whose terms to any one consumer depend on the acceptance of the contract by other consumers. For instance, labels might offer downloads from a given artist at a discount – but only if enough people offer to buy the good. Alternatively, they might try a pricing scheme where the industry offers steeper discounts the more people offer to buy an artists’ goods. The point is that schemes like this make private information and expectations public, allowing people to pool and share their risk.

All of these are essentially ways to let consumers hedge the extra risk they take selling a broken contract to agents they know are operating under conditions of extreme moral hazard. Right now, consumers only have one viable way to hedge that risk, and eliminate the moral hazard – by parceling it out, and sharing it with other listeners, via file-sharing.

So we’ve helped explain three crucial things. First, why many music listeners feel so much antipathy to the music industry – because they understand the moral hazard and large agency costs implicit in the risky broken contract they’re being offered. Second, why many feel morally conflicted about file-sharing, but continue to do so anyways – because they have no other risk-mitigating mechanism. Third, crucially, what the music industry can do in the face of these kinds of contract dynamics to revolutionize it’s business model.

Current Models

We can now take a look at what’s wrong with the latest efforts to market music over the net. Immediately, we can see that the most successful business model over the net will utilize prices to convey information rather than price everything at exactly the same value, and crucially, provide a mechanism for consumers to hedge their music risk. Sadly, all the major new services provide none of these things. They’re essentially the same old business model, minus physical distribution costs. Not a surprise from an industry that’s more afraid of change than death.

Itunes, for example, standardizes prices across most of its products – providing consumers no information about future value or risk. It also entirely ignores the role of the positive consumption externalities users produce, because it provides no mechanism to share playlists or file directories. Finally, and most importantly, the only mechanism that iTunes provides consumers to mitigate risk is 30 second sound samples. It’s unlikely that this is enough to eliminate the moral hazard labels operate under. But that’s besides the point: what it really means is that iTunes can be outcompeted easily by any service which provides everything iTunes does, as well as a more efficient risk-mitigation mechanism, such as more complete insurance, contingent contracts, or a limited and rights-protected file-sharing scheme.

Whatever the mechanism the industry decides to help listeners hedge risk, it’s important to note that it should be one that makes strategic sense. There is one simple risk reduction mechanism that would be even more destructive to the industry than file-sharing, and that the industry should avoid at all costs: price competition. If prices drop low enough – singles cost $0.99 on iTunes – listeners’ risk effectively disappears. But so do industry margins and the industry’s business architecture. It would be more strategically effective to construct a mechanism that creates value by hedging risk, eliminating the double moral hazard – and one that the industry can then trade for additional profits.

File-Sharing and Double Moral Hazard

Every major label 's setting up an iTunes these days. They're all, in the immortal words of Johnny Cash, 'born to lose, and destined to fail'. Why? The music industry doesn't understand the microeconomics of it's own business. If it did, it would see that it's business model is not just misguided, but broken- because, DRM or not, the implicit contract it signs with listeners is being broken in both directions.

I reached this conclusion because, as I was scoping BoingBoing one day, I read Cory's statement, and it struck me as exactly right. For many people, digital music's more about risk than it is about music itself. Not legal risk - but transactional risk, the kind of risk you take when you buy a used car. Now, this statement has deep economic meaning. I'd like to explain why.

Fundamentally, I'm going to argue that consumers download music, as much to derive extra value from getting something for free, as they do because they want insurance against buying something they didn't want in the first place. File-sharing is as much about risk-sharing as it is about the 'theft' of value. Technological changes have made this possible - but the way the business model of the music industry is at odds with the implicit contract it signs with listeners is what makes it probable.

Here are the basic economics of the music industry: The major record labels assume market risk in exchange for value. They take on the risk of assuming search, development, and distribution costs, in exchange for uncertain profits.

We can also look at this through the lens of contract theory. Contract theory says that principals contract agents to do things they're unable - for whatever reason - to do. In every such transaction, we can say that there are extra costs incurred. Economists call these costs agency costs.

So we can say that labels are agents hired by music listeners - principals - to perform a function they don't have the time to do - find interesting and entertaining musical artists. The problem is that this simple transaction creates massive information asymmetries. There's no monitoring mechanism, so listeners can't see what the labels are doing; conversely, labels can't really tell what listeners' preferences are. Even worse, the principals can't influence the agent unless they can coordinate amongst themselves to do so.

Now, in most real-world markets, information is an issue. Neither side in a transaction is perfectly well-informed about costs and benefits. But in most markets, prices are considered the central economic mechanism of information transmission, because they convey information about future benefits and future risks. This point is intuitive if we think about it: prices reflect the scarcity of a good. Think of the price of blue-chip stock, for example.

But, partly because of massive buyer power (the influence the biggest retailers exert over the record labels), prices in the music business have long since failed to carry any pertinent information. Prices have become, if not fixed, as many suspect, certainly standardized. And this robs consumers of a vital means to gauge how much future value they derive and risk they take when purchasing different music goods. It also robs labels of the ability to really understand consumer preferences.

So this forces listeners to rely even more on the record industry's - the agent's - choices. In this case, the principals are kind of blindly reliant on the agent - they have no mechanism to monitor the agent.

So what if, under such a contract, the interests of the record labels - the agent - diverge from the interests of the listeners - the principal? What if, for business reasons, the labels are more interested in economies of scale, scope, and brand than providing music listeners with music they value?

In an extreme case, the labels might begin to impose agency costs beyond the search costs the listeners are exchanging value for - making transactions with record labels provide negative value for listeners. Conversely, we can say that listeners might find it more efficient to take on their own search costs. And this is what's happened today. Many people are more happy to spend time searching for new music on the net than they are simply buying the goods the industry selects and promotes.

It's traditionally argued that the web reduces search costs. But this argument helps explain a very curious phenomenon: why music today is one of the few markets in which people, are, curiously, willing to pay very high search costs.

So the net actually begins to make it possible for people to pay higher search costs at all. They do so because they replace the agency costs imposed by the music industry - which provide them little value - with their own search costs, which do result in a transaction that provides them value. Before the web, people had little option but to pay the agency costs the music industry demanded.

Economists have a name for problems like this: moral hazard. Moral hazard happens when the actions of an agent can be hidden from a principal, creating agency costs - because the agent is able to shirk, take additional risks, and generally not deliver on his end of the bargain. In this case, the moral hazard is that the record industry, because listeners can't monitor or influence it, can effectively shirk, and choose artists not based on listeners' preferences, but based on business efficiencies. This is effectively what the record industry has been doing - adding massive agency costs that replace the search value it is supposed to provide. It's compounded by the fact that music is an experience good, whose value is not directly knowable to buyers - another fact the music industry has been exploiting.

The way to change the incentives implicit in such a moral hazard-creating contract is straightforward in economic terms - insurance. Insurance provides an incentive for the recording industry to choose only acts listeners value. At the same time, insurance means that consumers don't have to pay agency costs - the costs of the music industry selecting acts no one wants to hear.

But doing so would create a double moral hazard. The second moral hazard is trickier: offering insurance to listeners provides listeners an opportunity to hide their actions from the recording industry. Listeners might take advantage of the insurance, and renege on buying music altogether. If the industry offered consumers the ability to simply return any music they didn't like, consumers might return all the music - even the music they did like, after having copied or consumed it.

But this is exactly what the internet has done - offered music listeners a second moral hazard, in opposition to the first. The net offers a kind of gigantic way to renege on buying music goods produced under moral hazard, and completely eliminate the risk listeners take in buying such risky experience goods.

The point is this: the net offers listeners insurance against the music industry itself. File-sharing isn't simply theft. Rather, file-sharing is risk-sharing - against an industry with the freedom to undertake hidden action in the extreme, and not live up to the contract it has written. Remember, the contract said that labels would assume the risk in exchange for dollars from listeners - so when moral hazard lets labels try and push risk to listeners, is it any surprise that listeners try and minimize it by parceling it out? In fact, we could go even further - saying that file-sharing is a way for principals to punish agents operating under extreme moral hazard, with the hope of bringing the agents incentives into line.

In this sense, we can see that the music industry has played a large part in creating it's own problems, which we can call a massive double moral hazard. Next time, we'll examine how it can begin to solve them.

poetic justice

The Music Industry, artists and recording companies alike, grew rich over the last 40 years by corrupting the youth of the world. Their current troubles are an illustration of Karma in action. What goes around comes back to bite you in the butt.

big big picture in my opinion

(This might be obvious to everybody but I'll babble it anyway)
Whether the music industry are screwing the consumer or being screwed by the consumer I think theres a bigger picture.
Record companies historically made their business by discovering or creating talent, then marketing the talent to millions, and finally distributing their product.
As it turns out there is now something much bigger than them that can do all those things even better, more efficiently and in a more democratic process. I don't need to tell you what that is.
But what will become of the poor millionaire musicians now if their music was freely traded? Well it turns out they make a LOT of their money from tours (so much the record companies try to get a piece of it)
There probably is a hard limit to touring (factors of time and audience size) so Britneys unrealized extra millions will probably distribute out over smaller acts.
This will hurt the talent that prefers to stay in the studio or maybe they can figure something else out after the boy bands are crashing and burning without relentless record company marketing and promotion.

Music Industry Problems: Maybe The Music Just Sucks

Well, it's good to see some of the more mainstream press picking up on this idea. CBS Marketwatch is suggesting to the music industry that maybe (just maybe) the music industry's problems have less to do with all this downloading activity, and more to do with the fact that, well, um, we hate to break it to you, but most of the music coming out these days really (no, really) sucks. The article describes "musical lulls" between great periods of music creation, where most musical acts are more about "McDonald's rock" - taking a successful manufactured act and copying it over and over again. The article also suggests that the world has fragmenting tastes. That is, not everyone likes the same music, and not everyone wants to be forced to listen to yet another boy band. This, of course, is the perfect situation for the internet, where the music industry could produce much more customized niche acts for all the varied audiences. However, they've grown so accustomed to producing for the lowest common denominator that now that this plan has backfired, they've turned around and started blaming (and suing) their own customers.

http://www.billboard.com/bbcom/charts/genre_index.jsp

check the billboard out know who's the best... that you are competing to beat.