The Music Industry: Downloading reconsidered

Astonishingly, a radio-ready record costs around $250,000 to record these days. I'm not sure how this can be when for $5k you can buy a Protools rig that is 1000 times better than what the Beatles used to record Abbey Road, but let's accept for the sake of argument that that's the way it is (one wonders why it is that way... are modern production values a substitute for good songs and performances? Are we looking for ear candy or music?).

How does a record contract work? The chart below shows the distribution of earnings for various levels of record sales, assuming a 500k advance to the band (recoupable out of the band's share of royalties), out of which the band must spend 250k to make the record. The royalties at $10/CD (wholesale) are split 85/15 between the record company and the band. This is a simplified picture: normally the record's producer would get a few percentage points as well (which would come out of the band's share), and the record company would incur additional costs (music videos, tour start-up costs), all of which would be recoupable as well.



The 85/15 split is meant to compensate the record company for their risk of potential losses. If the album goes platinum (a million copies), the record company does very well indeed... the band, not so much. In practice, given all the other recoupable record company expenditures, it is very unlikely that the band will see any money at all for the album beyond their advance, unless it is a truly colossal hit. But there are several thousand albums released per year in the U.S., and only about 30 of them go platinum. Most of them don't even earn back their advance, and disappear into the discount bins as money-losers for the record company.

Naturally, an established "big name" band is not going to accept an 85/15 split, as such a band is very likely to sell several hundred thousand copies even with an "off" record. The downside risk to the record label is near zero, and the split is adjusted accordingly.

What does all this have to do with downloading? First of all, the insistence of the record companies that they are just "defending the artists" by fighting downloading rings extremely hollow... they are defending *themselves*. Most artists earn the bulk of their income from touring and merchandise sales, where they get a much higher share of the proceeds. Only a handful of superstar recording acts are harmed by downloading - the rest are in the flat part of the blue curve and couldn't care less if their songs are downloaded or not - in fact they probably benefit from the increased exposure.

So, if downloading only hurts the big evil record companies, should we all start downloading with light hearts and clear consciences? I'm not sure. I'm beginning to think about the service that a record company still provides in an Internet world. We don't need them to manufacture and distribute a shiny disc for us anymore (and we don't need to pay Apple a 35 cent cut of a 99 cent song to ship us a few megabytes when bandwidth and disc space are too cheap to meter), but we DO (perhaps) need record companies for *filtering*. I live in a major city, and on any given weekend there are 100 bands plying their trade. The job of the record companies is to prowl these sweaty clubs, looking for the "good" bands and signing them to record contracts, fronting the money they need to make a professional-sounding record, and thereby increase the odds that this band will come to my attention. Even if I disregard all record company advertising, don't own a radio, and rely on word-of-mouth from my musically sophisicated peers to make musical discoveries, the chance that *they* will have heard of the band in the first place is greatly increased by the intervention of the record company. Is that worth something to me?

The reward the record companies get for this service are the windfall profits they get when they manage to hit it big with a new artist, and it is exactly those profits that are most threatened by downloading. No wonder they're pissed.

There are so many other interesting economic issues here, but that's enough for now.

The ethics of file-sharing

Which of us can forget the first time they discovered that with a computer and a high-speed internet connection, the WHOLE WORLD of music (or at least quite a lot of it) was available to them? For free? Right now?

But there's a catch. It's illegal, and it might even be unethical.

I won't talk about the legality of this, since that's not a very interesting discussion: downloading copyrighted music from the internet is illegal in most jurisdictions, case closed.

But is it *ethical* to download music? Is it ethical to share music files you have downloaded with others? (ie let them upload from you, just as you did?)

Obviously, the artist doesn't get the revenue that "they would have gotten if you'd gone down to the store and bought the record" (see how old I am! I talk about 'records'!) And that might be worth feeling bad about. However:

1. Some of the money you spend on a record covers manufacturing costs, and some of it covers retailing overhead. Well, you don't need to pay for manufacturing costs because your computer does all the "manufacturing", and you don't need to pay for retailing costs because the other person's computer does all the retailing for free. So you needn't feel any guilt about forgoing *those* costs. (I'll deal with the "but what about all the poor starving record clerks and entertainment lawyers" argument in a second).
   
2. Some (quite a lot, actually) of the money goes to the record company. Do you really feel bad about 'shortchanging' them? What did THEY ever do to deserve your money? (I'll get to the "but they promote new artists" argument in a moment).
   
3. In fact, only about 7 cents of your record dollar goes to the artist.
   
4. What if the artist is far too rich need the money? Many of them are, of course. Paul McCartney has several hundred million dollars in the bank. So what if I download a Paul McCartney song, rather than giving him yet another dollar that he'll never be able to spend before he dies? (I'll deal with the "yeah, but you're still getting something for nothing, and that's bad" argument in a moment).
   
5. What if the artist is dead? Kurt Cobain certainly doesn't care if I download any Nirvana tunes.
   
6. What if the artist hates the music business and doesn't give a crap if you download their songs or not? (see 5)
   
7. What about all the times you bought a new album and found out it was crap? Did the record company ever send you a refund cheque?
8. Legitimate downloads are crappy quality 128 kpbs files. No way I'm paying a dollar for those. A dollar is an absurdly high price to pay for a bunch of recycled bytes anyway.
9. What if I'm downloading music from an album that I used to own, but was stolen? If my CDs are stolen am I morally obligated to go to the store and buy them again if I want to hear those songs?
10. What if my CD becomes scratched or damaged? Am I obligated to give the artist MORE money?
11. Here's the biggie: What if I wouldn't have bought the record anyway?? Let's say I value a particular song at 25 cents. I can download it for free, or I can download it for a dollar from a legitimate source. What if I had no way of illegally downloading the song, but the song isn't worth a dollar to me? Then I don't download the song, and the artist doesn't get any money anyway.
12. Here is a related question: what if I don't want to buy the album until I know whether I like the music or not? Not everything I like gets played on the radio. If I can't preview the album I'm not going to plonk down $15 on an unknown quantity. (The conclusion of this last: it's OK to download music, but if you like it you should buy it.)
    

Some more random thoughts before I have to go back to work:

Some more random thoughts.

Getting "something for nothing" is not immoral, it's the heart of economic efficiency.
People losing their jobs because a more efficient way of doing something is found is also part of economic efficiency.

What do record companies DO, anyway?
Do music lovers need record companies? Do artists need record companies?

If you're an artist, the record company will elevate you to undreamt-of heights of wealth and success... if they think you'll sell. Otherwise, they'll elbow you aside.

How would I hear about new music if the record companies weren't kind enough to tell me about it? They bribe radio stations to play music. But I can hear about music via word of mouth. Radio stations play songs which they would have played for free anyway.

Record companies CREATE value by creating 'network effects'. The value for the listener is the fact that everybody else is listening to it.