Corporate Entitlements: Music Edition

Well sorry to all for the two-week absence, but I’m back from being on the road and all the end-of-semester stuff the school requires.

There’s a myth that’s pushed and carefully nurtured by corporate executives and conservatives.  It’s the image that “private enterprise” lives and dies by the market and that the profit motive is a powerful method of harnessing the enormous managerial energy and creativity to society’s benefit.  It’s an extended version of Adam Smith’s “invisible hand” metaphor which is often improperly joined with Smith’s quote about “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.[4]”  The myth holds that privately-owned businesses, when seeking profits, are acting in the public’s interest.  Of course, the people who push this myth have never read Smith.  Smith did not hold that at all.  Instead they build their case on a simplistic understanding of neo-classical microeconomics.

But one of the problems with neo-classical microeconomics is that it assumes the rules are fixed. The myth assumes that business people don’t try to bend or change the rules to their favor (something Smith recognized back in 1776).  Under the neo-classical myth, businesses only make above average profits when they either produce more efficiently than competitors or create a better product than competitors.  The neo-classical theory we teach in Principles courses has no room for firms that bend the rules to favor themselves and disadvantage competitors.  In the theory, corporations behave like sports teams.  When a new technology or new product propels an upstart competitor to become dominant (“win in the market”), the established large firms simply take their lumps and like good sportsmen accept their losses and reduced size.

In the real world, a world that is increasingly oligopolistic, firms don’t behave like good sportsmen.  Instead they bribe the referee.  They cheat. They blame the fans (customers) and get the government to keep them in their former high-profit splendor.  It’s a lot easier and more profitable.  In the real world, being innovative, constantly striving to improve efficiency, or adapting to change is hard work.  Harder work than the executives of large corporations want to do.  It’s much cheaper, easier, and even fun (politicians throw parties!) to manipulate the government.

So what’s this have to do with music?  The music industry has a very long history of using government to manipulate the outcomes, stop competition, and keep them flush with unearned monopolistic profits.  The primary tool is copyright law.  Copyrights, like patents, are nothing more than a government-granted monopoly.  It’s protection from any competition.

The recorded music industry has become a tight oligopoly dominated by four firms.  Unlike the 1950’s and 1960’s when small independent labels could get distribution and grow if they found a “star”, the industry is largely in the hands of the big execs at these four firms.  First with vinyl, then cassettes, and then eventually CD’s,the industry grew fat, rich, and concentrated in the 1970’s through 2000. But technology moves on. People want it in digital form in MP3’s. They want to share it on the Web. But rather than adapting to the new technology, or rather than accepting their fate as a declining industry, the industry has fought back by pushing to change the rules.

The music industry has pushed the interesting concept that recorded music is simultaneously “property” (their “intellectual property”) but that when we buy a copy we aren’t getting any “property” at all.  We only get  a license to use it on one machine and we can’t re-sell it.   The industry has claimed that it’s the victim of theft and file-sharing, although their analyses are weak, flawed and wrong. They have claimed that file-sharing is “destroying” their business.  But it turns out that’s flat wrong too.  From Dwayne Winseck of the Toronto Globe and Mail we get the following (hat tip to Stephen Downes):

 But stop the music. What if this image of a beleaguered music industry is flawed?

In fact, the music business appears to be in peril only if we focus on just one element of the business, the “recorded music” segment. Doing that, however, ignores the three fastest growing segments of the business: concerts, Internet and mobile phones and publishing rights.

Include them and the portrait changes dramatically, as the figure below shows:

The music industry is not in decline. In fact, the “total” music industry has grown from roughly $1.26-billion in 1998 to just over $1.4-billion today. Worldwide, the growth has been even more impressive, especially in the fast-growing economies of Brazil, Russia, India, China and South Africa (the BRICS).

But the reshuffling of new and old elements in the industry has not been kind to the traditional big four global record labels, EMI, Universal, Warner Music and Sony. A few massive concert promoters – Live Nation (Ticketmaster), AEG, etc. – also threaten to usurp their place at the centre of the music universe. Bands such as Radiohead, the Arctic Monkeys and Pearl Jam now go straight to audiences with their music, while picking up whatever slack ensues through concerts.

The graph illustrates very clearly what’s happening.  People (customers) are shifting in their preferences due to changes in technology and lifestyles. People want more digital music on mobile devices and more live music.  The flexible, innovative upstarts are bands like small independents that record and sell their own music by pushing it at live performances. Or it’s established bands like Radiohead, Arctic Monkeys, and Pearl Jam that push the digital music out on the web, often free, in order to increase concert sales and related merchandise.  The total music industry (the orange line) is doing OK, particularly when we consider there was a nasty recession in 2007-09. But the model of recorded music sold by a tight oligopoly of music execs that are paid excessive compensation to tell us what to listen to is dying.  Unfortunately they are responding by pushing for more and more restrictive laws that protect their privilege, their monopoly.  The reality is that most so-called “piracy” is really the result of the recorded music industry failing to respond to genuine market opportunities.

I find it interesting that conservatives like to attack social insurance programs like Social Security and unemployment compensation by claiming they are “entitlements” that people don’t earn. Yet, they never seem to call copyright laws what they are: corporate entitlements.

The Death of Recorded Music Sales

First, let’s look at:

The REAL Death Of The Music Industry

 

Michael DeGusta | Feb. 18, 2011, 12:13 PM

    In January, Bain & Company produced the following chart as part of their report on “Publishing in the Digital Age” (PDF):

    Music Industry

    Image: Bain Analysis

    Then on Tuesday, someone posted it on Flickr. Subsequently, Peter Kafka of Wall Street Journal’s MediaMemo noticed it and passed it along to Jay Yarow, who made it Business Insider’s Chart of the Day on Wednesday, citing Kafka and the Flickr post. On Thursday, the excellent John Gruber at Daring Fireball linked to it and between those two postings the chart garnered a fair bit of attention, including from the likes of apparent digital music expert Bob Lefsetz (“First in Music Analysis”). No one seems to have tracked it back to the original source nor noticed what happened to catch my eye straight away:

    This chart sucks.

    What’s Wrong With It

    Oh, Bain – I hope no one has hired you for your expert “analysis” in this field:

    • The chart uses raw revenue numbers, not adjusted for inflation or population.
    • The chart is labeled “Global Music Turnover” but the data is actually US only. 1
    • The chart says “Bain Analysis” but it’s very unclear that they did any analysis, since anyone paying the RIAA $25 can login and immediately see virtually the same chart, albeit formatted slightly differently.
    • They fail to clarify how & if they distribute the RIAA’s 16 sometimes vague categories amongst the 4 they use.

    The Right Chart

    Music Industry

    Image: Recording Industry Association of America

    All discussion herein is for US recorded music as covered by the RIAA. The above chart is adjusted for inflation & population – for full details, see below.

    Obviously the recorded music biz has a significant decline in total $ of sales since it’s peak around 1999-2000. But, then the industry had quite a run there from 1986-2000.

    So what do you think accounts for the decline in sales, especially the decline since 2005?

    1. It’s all those kids ripping off the poor studios by file-sharing copies of music
    2. Um, a whole lot of discretionary spending has tanked since 2006. We had a Great Recession, recorded music is actually kind of a luxury and not essential and the only people with rising incomes are the Wall St types and they don’t listen to that much music.
    3. Well, most of the new music is crap that doesn’t sound that good thanks to all the new fangled processing – certainly not as good as the old days when the world’s greatest rock-n-roll band recorded on vinyl.
    4. It’s not really a good business practice or sound marketing strategy to be suing your customers all the time for alleged copyright infringement.
    5. Wasn’t 2001 when Michael Jackson’s last album came out?  Bieber just can’t compare.

    SO what’s the correct answer?  Well it helps to dive a little deeper (see the full article here:  http://www.businessinsider.com/these-charts-explain-the-real-death-of-the-music-industry-2011-2#ixzz1FOmV58XD)   But essentially it seems that the biggest culprit is the switch to digital formats, but not because of any piracy issues.  Instead digital formats (iTunes, MP3 sales) has had the effect of switching sales away from albums and towards singles-only.  Turns out the industry in the past was built on a model of sell a bundle (the album) of mixed stuff.  The one or two songs the people wanted with a lot of crap they didn’t.  In digital world, there’s no need to bundle. Consumers just buy the one song they want and don’t end up buying the other songs on the album.  Result: huge volume drop for the record labels.

    Of course, personally, I think it’s still a lot #3 above.