Why digital music is worthless and how bands can derive value from it
Anyone who has taken a basic economics class knows that the value, or the price, of anything is directly derived from how scarce it is. Things that are abundant are cheap, while anything that is hard to find or make is going to be much more expensive. Now when you relate this knowledge to the music industry, things start to make sense. Digital music formats cost next to nothing to make, store, reproduce, or distribute, so there are many more copies of any particular song or album than there ever were of CDs. And because there are so many digital music files like MP3s floating around peoples’ computers and on the web, the economic value per file is very close to zero.
You could make the argument that, while there are so many copies of music available online (in other words, the supply has increased), the demand has increased as well. Because it’s now so easy to find music online, it makes sense that demand has risen. But the rise in demand is actually quite small compared to the increase in supply, because it costs nothing to make another copy of a digital file. The supply is essentially infinite, but there are only so many people who would ever be interested in certain music, no matter how popular it may be. You also have to consider that the demand per artist within a person’s own music collection has decreased. Most people today play much more music than they did decades ago, but there is still only a given period of time when someone can listen to music. Each artist gets less total play time per person, in general, so again the value has decreased. Any way you look at it, increasing supply far outpaces the increase of demand, resulting in music files with no real economic value.
Consider the monetary value of someone’s music collection. A decade or two ago, a music fan might have a 320-disc CD wallet filled with their favorite albums. At an average of 12 songs per album, they would have access to 3,840 songs in their collection. And for $16 per CD, it would have cost them $5,120 to purchase them all. We can also calculate that each song had a value of about $1.33. Now, if you assume that the total value someone is willing to pay for their music collection has remained the same since then, and you divided that into the 20,000 songs you can store on an 80 GB iPod, the value of each song drops to about 25 cents. Keeping our average of 12 songs per album, each album is now worth $3. But in reality, the average person is no longer willing to pay $5,120 for their music collection because the economic value of music has gone down because digital formats eliminate scarcity and create ubiquity. So if that same person now goes and buys an iPod classic for $249 knowing that they can fill it to the brim for free, the cost of the iPod has become the new value of their collection. That means that in today’s economy, a song is worth little more than a penny, and an entire album is worth about 15 cents.
We have established that the economic or monetary value of something goes to zero when the (potential) quantity goes to infinity. Therefore, with digital music, the fixed, base value is zero. However, there is another kind of value that we need to consider (some smart people already are) which can be added to the base value. It is the personal, emotional value, like what something means to someone or how much they love something. And while this value can’t be measured in economic terms of dollars and cents, it can be “converted” into a monetary value.
People are certainly willing to pay for economically-worthless material, we see it happening all the time (like whenever someone pays a thousand dollars on Ebay for some piece of garbage just because John Lennon wiped his ass with it or something). The problem we face is that, like different countries’ currencies, the exchange rates of these values from personal to economic differ from person to person. They have no fixed value, and can even change dramatically over time. And because it is impossible to measure such an exchange rate before every purchase, the very best way that we have of tapping into the converted value is to allow people to pay whatever they want for a music download.
Now musicians and labels know what they need to do with digital music downloads, all that remains is to trust people enough to let them hold up their end of the deal. It’s not going to be easy, especially at first, to let some people pay just a few cents or a dollar for an entire album, but you will have to accept that the reason they chose to pay so little is because that’s all it was worth to them. If someone’s emotional values towards a song are “converted” into just a few cents, who are you to argue? It’s just not possible to know exactly what music is worth to any particular person.
Along similar lines, we must also realize that there is essentially no emotional value in a song before it is purchased, or at least heard, with the exception of a few hardcore fans of a band who have at least a few dollars of expected value for the musician to begin with. You need to allow enough time for the emotional value to grow. What bands and labels need to do is to collect permission from their free digital music downloads and then send out an newsletter or an individual email to people a few days or a few weeks later. By this time, people will have listened to the music enough times to let it absorb a bit and form an opinion of it. Ask them if they liked the music and then suggest a donation ala pay-what-you-want style if they haven’t made one already. That would be the opportune time to let them make a donation, not right at the beginning when they are presented with an MP3 file that has no value to them yet.
I remember back in the early summer when I was interviewed for a job at the now defunct digital music company BurnLounge, they laughed at me when I responded to a question that donation-based MP3s are the future of music online. Then I learned that they were under investigation by the FTC and I laughed back. Since then, bands like Radiohead and musicians like Trent Reznor and Saul Williams have been brave enough to take the first steps in opening up this idea to the mainstream, and I applaud their efforts. Digital music must be free (well, you could charge 15 cents per album if you really wanted to), and individuals must be trusted to convert their emotional values into a monetary value and donate what they feel is appropriate for them. If you treat them right, they will treat you right.
What do you think? Come on and voice your opinion now!
February 6th, 2008 at 3:37 am
It’s a good article, definately!! I still really wonder how many people are willing to pay money, even for something they love, if they don’t have to… certainly some would but… some people just want things for free & don’t consider the repercussions of not supporting a band or maybe they’re too lazy or have other excuses…
February 12th, 2008 at 9:32 am
Greg -
While I agree with your idea that digital music is “cheap,” it definitely isn’t “scarce.” You’re saying that music operates in a perfectly competitive market and that one type of music (say Paris Hilton’s album) is as good as another (say Metallica’s And Justice for All). Not entirely true, but in a sense, yeah. An mp3 is an mp3. But you could compare it to two farmers with a lot of advertising money saying that the other’s produce is consumed by dorks and is also 40% animal semen. They can make more 0s and 1s instantly and while there’s a cost to serve the mp3s, it’s small in comparison to the cost it takes to sell that same song on a CD.
But here’s the rub: it costs them a lot of money to get music from a producer’s brain into an mp3. It also costs a lot of money to turn a no-talent hack into the Britney Spears we know today. That cost gets passed along to us, the consumer. And since people constantly vote with their dollar that pop music is worth listening to - we’ve got a problem.
I think of the music industry as a close relative to the pharmaceutical companies. It costs them a lot of money for R&D and advertising. Gobs of money go into every pill. It wouldn’t be economically fair for them to get no money for their product. But it’s not fair to society for them to charge insane fees for something that everyone should have access to. So we let them gouge us for the patent period until the medication goes generic. Prices drop like a rock after the stuff goes generic.
So here’s my idea: Band goes to the record label. Record label signs a 16-month deal with the band. The record label gets a major part of the profit to recoup their losses in that 16-month period. It keeps the incentive there for the record label to find new artists. But it removes the need for popular artists to stay with major record labels unless they want to.
As a side point: The reason you’ll never see music for “cheap” is because record labels, like movie studios and all other major media producers, still want to make money off of a flop. They figure if they hose enough crap at us, some of it has to stick. Right now, people are downloading shitty music for free. How dare they. That pressures the record company to work harder to find something that sells. As long as there’s a cartel like the RIAA, your idea won’t happen for sure. (Mine neither.)
After the 16-month deal, the record label still retains publishing rights. Just not EXCLUSIVE publishing rights. If an indie label that distributes music online wants to pay them more per mp3 than the record label does, the band can make an additional deal with the 3rd party. Obviously, the record label could lower prices, but it won’t. For the same reason big pharms don’t. They will put commercials on TV saying that downloading mp3s from little indie guy gives you herpes. And little indie guy can’t respond except by providing a better service at lower prices. (Which is entirely possible.) That way the idiots that want to use iTunes get “gouged” while I download an album for 25 cents off a site like eMusic. (Note: LIKE eMusic. They’re still more expensive than 25 cents an album.)
Donation-based mp3s could work for bands like Radiohead, but only if they use reputable companies to handle the donations (NOT PAYPAL). And I’d much rather go to ONE company than to 600 band websites to donate and download. There’s a reason record companies exist - just not the actual reason most of the current record companies exist.
February 12th, 2008 at 9:35 pm
I agree with most of the things you said, and I like a lot of the ideas you talked about as well. I’ve got plenty of ideas for weird models myself which I want to post about later on. But first…
Of course digital music not scarce, I don’t think I said it was. MP3s are totally ubiquitous. And I guess I should mention that this is mainly about music files, not the music itself that is contained within the files.
If a band works on an album for a certain period of time and spends some sum of money on it, sure, there is a production cost and they certainly deserve to get paid for it. The means of establishing a price for music this way is (or can be) perfectly valid. But unfortunately for the musicians, they’re not the ones who can determine what that music is worth to listeners. (Just like in your analogy with the pharma industry, people don’t buy pills because someone spent loads of time and money developing them, they buy pills because they don’t want to die.) Back in the day, if the price of an album was less than what someone thought it was worth, they bought it. If the price was more, they didn’t. That general rule still works the same way today, but the internet has changed the proportions of how the value of music is constructed, so I just think we have to take another look at it.
The main point of this whole thing is to look at what value is made of, regardless of what the product is, and break it down into pieces so we can get a better idea of what something is worth. There are 2 components to value, a fixed value and a non-fixed, variable value. You add both of these together to determine the total value to the consumer/listener. Depending on what the product is, it may be composed of all fixed and no variable, the opposite, or some of both.
The pure economic value is the fixed value which is determined by scarcity. An MP3 is just a file (we’re not looking at what song or band it is yet, it’s just an file format so far) and is worth next to nothing. The variable value is what I referred to as the “personal” value in the post and it doesn’t really have a specific dollar value. It’s what you are willing to pay over and above the pure economic value based on what you think or how you feel. This is where the music contained within the MP3 file comes into the picture. It just so happens to be that music, as is any artform, is highly subjective and so its value is largely variable.
If people are willing to pay 99 cents for an iTunes download, it’s because that person’s individual, variable value is worth 98 cents or more, because the MP3 itself (the fixed, pure economic value) is only worth about a penny. They are willing to pay that much because they like the music, not because they actually think an MP3 is worth 99 cents. Because the value of music is now, thanks to the internet, almost entirely built from a value that varies from person to person, it just doesn’t make sense to charge a fixed rate for the music anymore. (I guess the post’s title is a little bit of an attention grabber. Only the “digital” part is actually worthless. The “music” part does have value. What that value is just depends on who you ask.)
The factor of time invested to record an album is not something most people think about when they are buying music. Most people, even when they do think about it, don’t actually know what it takes to produce an album. What bands really need to do is include a list of all the expenses and time and everything else that it took to produce that album or that song. Unlike the pharma industry, the costs of making a product in the music industry are not widely known, so educating people in that regard could make some people reconsider what value they give that piece of music. But, going back to the variable value thing, time cannot be directly translated into money. Just because a band says their time is worth some amount, that doesn’t mean a fan thinks it has the same value. So again, even by adding time, the value of music is still almost entirely variable as far as the listener is concerned.
So that’s my take on how people determine the value of music, or any product, really. Whether or not bands and labels should charge for digital music according to what people are willing to pay is, of course, still up for debate. I kind of like your idea about the fixed period contract and then opening it up as a non-exclusive deal. I think that’s taking baby steps, though, when I am in favor of a total 180 change from what the industry looks like right now. I’m still working on writing that idea down, though…