Imran's personal blog

June 19, 2012

About the music industry

Filed under: Uncategorized — ipeerbhai @ 8:56 pm

Hi All,

I read this post on the interwebs:

http://thetrichordist.wordpress.com/2012/06/18/letter-to-emily-white-at-npr-all-songs-considered/

He’s absolutely right, but in an unenforceable way.  My background is in economics.  In Economics we have this concept of homo economicus — the perfectly rational, entirely self-interested person.  We believe all people are this way.  Some comics and other things set out to prove it false — but their examples only prove it correct.  For example. the first panel has a “Free electricity” theme from a coffee shop.  The thing is — I know people who live near coffee shops that have free wifi.  None of them pay for internet — they just hop on the wifi of the coffee shop, since it’s always on, and always in range.  There’s a social norm against running cables to other people’s houses/workplaces.  If it didn’t exist, people would leach free power if they could.

And people who download music are no different.  They will rationalize their choice in many different ways, but the argument is the same.  All of them are saying, “It’s in my interest to do this activity, and dang it, I have a right to!”  Even if, by social convention, the right is not there.  Everyone agrees that the law says it cannot be done, and some even understand why the law is such, but choose to do it anyway.  I eat chocolate.  Almost all chocolate in the world is grown by child labor or slave labor.  There is no real thing as fair trade chocolate, though some have tried.  I like chocolate, and though it may be morally abhorrent to eat it, I find myself unwilling to give it up.  Many of us drive cars.  Though cars are a poor use of resources, environmental disasters, and murderous weapons, we would not give them up.  Many of us pride ourselves in our cars, or in out driving ability — though science shows that no humans should drive, and common sense dictate that pride in an inanimate object is meaningless.  Yet, few of us would forgo our cars, and none of us pay the true cost of them.  Society subsidizes them in the form of “free” roads.  I live on stolen land — the native inhabitants being wiped out by disease and war — as do most Americans.  Yet I would not give up my house in the suburbs in order to do what is right.  Homo economicus at it again — if people were not self interested, they wouldn’t drive cars.  There is no disputing that people will do what is in their interest, even though it may be costly to a segment of society, or even to society as a whole.

Trying to enforce regulations, though correct, where the cost of enforcement is impossible, simply will not work.  In order for a system of rents to function, the rents must be charged at a precious point in the channel.  In the past, before the advent of the Internet, the music business could charge its rents at the distribution level.  One could copy music off of the radio, or through friends, but this was impractical.  A large opportunity cost had to be paid in order to do so.  Whether that cost be “call in and ask, then wait for airplay”, or whether that cost be, “Find a friend who has what I want, then ask them to loan it to me”, or even “Buy a blank tape”, it just wasn’t easy to copy a thousand songs for the average teenager.  Moreso, music is consumed mostly by people in the years before they mate and reproduce.  Having the right songs could mean a perceived improvement in mating ability.  Teenagers think of it as, “She and I have the same tastes!”  There are odes and ballads written to this fallacy.  Nonetheless, being part of the mating system, music has a tendency to skew towards those least able to afford it.  Thus, a high perceived value( “If I have this song, she’ll like me!” ), linked with  low ability to pay( “But I spent my allowance on new shoes” ), provides ample incentive for theft and rationalization.  One of my friends once shoplifted from a store in front of me.  She had the means to pay for the item — but she justified it as, “These stores make so much, I should take this to even out what they take from me.” Thieves of all sorts rationalize.

I myself have worked in the Tech industry, specifically on making the technology used to pirate music.  While we posed high ideals and rationals, “We make recording and broadcast equipment!  We give it DRM, so it’s not easy to steal from this!”  We all knew this was a lie.  We knew that our work would be used primarily for piracy and pornography.  I wanted a job, and the company had money to pay me.  A company who, by its own numbers, is hurt by software piracy.  So, we did have sympathy for the producers of music, since we believed they, like us, faced the costs of piracy.  This is why we did put in DRM and other barrier technologies — we really didn’t like piracy, because it hurts our business.  Sympathy for the devil by a demon, if you will.

But I realize that it is impossible to stop this piracy.  The thieves are too hard to detect, and the precious channel points do not exist in a form that can be monetized.  Those points are now at the supplier side, and it makes no profit for a supplier to charge themselves rent.  It only takes a single consumer with the right equipment to decode any file and copy it in a lossless format, and the entire distribution chain to the consumer is no longer monetizable.  Perhaps 10%, if that, of the market will pay the rents as a form of obligation — they do it now because they feel it right, rather than because they must in order to access the product.

So, a new model must come into existence.  And I now believe I understand how to make a model that will work in monetizing music.  It also will never happen — the industry cannot do this as of yet, but it is their only hope.  The music producers must become the technology suppliers.  The music industry, as it is structured currently, is more of a financing/scouting system.  The industry scouts out talent, fronts a fee, pays for recording costs, and advertises the result.  The assumption being that the distribution cannel will provide the needed costs to recoup this investment and to provide royalties.  These are the steps needed to make this so:

1. All new music must be in a new format, agreed upon and standardized.  This means that Sony can’t have a codec different than BMG.  It also means no current codec may be used.

2. This codec must be fully encrypted at all times.  Even headphones and the like must have a keyed system.

3. the devices that play music must be manufactured by the music industry, and have the ability to flash update.  When the encryption is hacked, as it will invariably be, the standard must be able to change instantly.

4. All songs will be “lifetime downloads” — every time the standard changes, all legitimate users must be auto-converted to the new standard.

5. The store where music is bought, say an online store, must be owned and operated by the industry.  Certain devices must not be able to access this store ( say Linux PCs ), or be able to play this music.  While blatantly unfair, perhaps even unethical, it may be needed to retard the pirates.

6. The payment model to artists must change.  Less curation, more distribution.  The apple App store being a good model.  Artists come with recordings made, all can place their music in the channel, and all recoup 70% of the sales.  The music industry skims a fixed % off the top, and provides matching advertising to songs with sufficient sales to justify marginal investment.

In short, the Music business must become Amazon, or perhaps Apple.  They must make their own Kindle.  They must make their own store.  They must allow musicians to self publish. We call this Vertical integration.  Another type of business will also arrive with this vertical integration.  Venture capital.  Self published authors are already getting good royalties.  A V.C. could go to someone they like, front a full fee to this person to write a book or make a song, and then they get the be the “Author” of that work.  This will become the music business.  This will become the book business.  This is the only future that works.  And like it worked in books, it should work in music.

Consumers may like this, or may tolerate it.  No pirate will endorse this.  The free software guys will hate it — it makes information unfree.  No part of the music industry can accomplish this.  The tech industry would hate this.  It would violate existing laws, as it would require a level of collusion not allowed in the market.  But for artists to survive, it may be needed.  We cannot assume the pirates will stop.  We must assume the entirety of the market would opportunistically pirate.  Indeed, even those who consume music legally either occasionally pirate, or at one time did pirate.  We can also assume that piracy really is killing the music and movie business.  And unless piracy is stopped, we will simply end up with more “Justin Bieber” artists — as these are the only ones whose popularity is high enough to monetize in a world with piracy.  Piracy’s primary cost is the lack of availability of different styles of music.  Pop will survive .  The esoteric will not.  Piracy does the most damage as the scale of the artist decreases.  As it does in books.  This is why “Flat out love” could not find a publisher — it didn’t fit an existing sales model.

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