Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Making Money Without DRM

There is an article over on Ars Technica about emusic. After Apple they are the biggest vendor of online music. The interesting feature is that they sell MP3 tracks without DRM - which has the advantage that their music runs on anything, the iPod, for example.
The majors are terrified of piracy and so insist on strict DRM controls to safeguard their music. The indie labels that eMusic works with generally don't have that fear. "The indies have always viewed the world differently," says Pakman [the CEO of emusic]. "You know, the indies struggle for attention, for customers, so the notion of someone actually digging a track and e-mailing it to 10 of their best friends doing self-promotion that's music to the ears of the indie record labels. Whereas an RIAA member says, 'We've got to sue that guy.'"
In other words: the marginal musicians - the ones who might stop producing music if they made less money - aren't getting much benefit of copyright. It is the star musicians - the ones who would keep right on making music for a fraction of what they are paid now - who benefit from copyright. But the purpose of copyright is not to enrich the star musician at the expense of everyone else.


I assume this is true for novelists as well. Copyright surely benefits the J.K. Rowlings and Dan Browns of the literary world much more than the workaday writers who grind out a modest living selling a novel every year or two and scrape by making a lot less than the bestselling authors. Even so, the superstars, not the also rans, are the ones who get pirated, as this article illustrates.
Wait, isn't the purpose to promote the creration of quality arts? As contrarian as I may be, I still have to admit that the stuff on itunes is >> than the stuff on emusic. I downloaded a couple gigs there back when it was all you could eat--I used top 100 lists and ratings on the web and still very little of it remains undeleted. If copyright supports the good stuff and not the bad, is that wrong?
Certainly the purpose is to create quality arts. But the things that are hard to get produced isn't the really good stuff. Shakespeare and Mozart created their great works without copyright - so the question isn't whether the people that produced the good stuff on itunes want to make more money so elected copyright, but whether they would have produced it even without copyright. Since the people that produced the bad stuff on emusic apparently found it worthwhile to produce for very little, that is some reason to think the people that produced the good stuff - and who would earn more money than the "bad" guys with or without copyright - would have produced without copyright.
But certainly don't many of the marginal musicians desire to become star musicians, and doesn't that dream of becoming a star sustain at least some of them? Is it that unusual to argue that a marginal musician might wish to give away his music now in the hopes of becoming famous one day and then being able to charge high rents for it?

That wouldn't mean that those marginal musicians are against the copyright system, merely that they want their music to spread widely until they become famous. It's somewhat inaccurate to present a dichotomy between marginal musicians and star musicians-- many of the latter started out as the former, and many of the former hope to be the latter some day. It is the dream of (some small probability of obtaining) monopoly rents obtained from copyright that keeps many of the marginal musicians in the business.

In that way, the marginal musicians who do not become famous may not receive the material benefits of copyright-- but that's a very different statement from saying that they would have produced it even without copyright.

It is inaccurate to define the marginal musicians as merely "the ones who might stop producing music if they made less money." They should be defined as "the ones who might stop producing music if their expected outcomes declines." Many of them no doubt overestimate their chances of hitting it big.

Suppose, as a thought experiment, that a particular marginal musician believes that he has a 1% chance of hitting it big. If he does not hit it big, he will make $20,000/year. If he does, he makes $5,000,000/year with copyright protection, but $2,000,000/year without it. Removing copyright protection does not affect his current income nor his income in the vast majority of cases, but reduces his expected income by $30,000/year, which could easily be the difference when deciding whether to continue to be a marginal musician or whether to work a different, steadier job which pays $45,000/year.

Hence, less music would be produced without the marginal musician's income going down in 99% of casess or more.

I agree entirely with the analysis in the two posts by John Thacker. One justification for the high amount of money paid to stars is that it provides more incentive for marginal producers who hope one day to become big stars. The question is an empirical one: how significant is this effect. Several comments

1. If the $2,000,000 difference in the last example is sometime in the future - say 5-10 years, the incentive effect is correspondingly diminished.

2. If the effect is because aspiring musicians greatly overestimate their chance of becoming stars the welfare consequences are unclear: is our goal to take advantage of the foolish beliefs of aspiring musicians so that they will produce more music?

3. In the case of writing novels the empirics are pretty clear. There may be some effect in getting the first novel written. However, after the first novel, the size of market of that novelist is pretty clear. Interviews with novelists who make a decent living at it show that they aren't doing it in the (ridiculous from an empirical point of view) hope of becoming Stephen King. In fact many novelists start as amateurs, turning professional when the modest income they make from their writing becomes sufficient to be comparable to what they are making in their other profession.

4. In the case of both novels and music - it isn't clear that there is a big problem to be solved. That is the evidence is strong that people write novels and write and perform music because they like to, not because they are expecting to get rich. Those few who are good enough to make a living at it stick with it; those that can't drop out. Which means the issue is the amount earned by the "marginal" author/musician not the amount earned by the "star" author/musician.

Fair enough. I assume that the original phrasing was mostly a case of shorthand on your part. Your comments are of course interesting.

Point 1) is certainly correct, though it is also motivation for many.

In response to point 2), it's an interesting question on whether society should take advantage of mistaken overoptimistic beliefs by musicians. Certainly it does end up producing extra music without much copyright protection or producer surplus, and "pays back" society in some sense for the monopoly rents extracted by consumers. Shifting from music, there is a good deal of evidence that entrepreneurs and inventors overestimate their chances of success as well. But society as a whole does benefit from innovation, even if many of the aspiring end up failing, and benefits more than if the entrepreneurs and inventors had a better sense of their chances of success, much of the evidence shows.

Phrasing the argument another way, perhaps, if society could tell ahead of time which artists or inventors or entrepreneurs would be successful, then managed or planned economies would be more successful. Yet they aren't.

In response to 3) and 4), note that a decent number of the indies referenced in the original post can be considered amateurs, and who hold other jobs. For many of them, being "good enough to make a living" in order to stick with it means getting an advance from a record label, Indie Record Label (many of whom have contracts similar to those of the Majors these days) or Major. The labels are in it for the money, and the labels make those offers with the knowledge that only 10% of those signed will make money for the company, but that a fraction of those 10% will make tremendous profits for the companies. While novels may clearly establish the size of the market of a novelist (an assertion I'm not totally comfortable with, as I know of quite a few contradictory cases, but I'll go with it), that's not necessarily the case for musicians.

While many of the people who write novels or perform music do so because they like to, they still would like to make enough to make a living at it, as you point out. If being able to make a living at it as opposed to being an amateur is related to being able to sign with a label, then the amount earned by the star is important, because that affects the record label's calculations and willingness to sign bands with lower percentages of success, in the label's opinion. The analysis would then lead to more people dropping out of being an artist or author, because of fewer contracts offered by publishing houses or labels to authors or artists with marginal chances for success, if copyright protection were reduced.

It is also interesting to compare it to other winner-take-all markets, such as sports. Certainly most people play sports because they like to. Yet there's also evidence that the potential riches involved for success motivate people as well, sometimes distressingly so (with highly unrealistic estimation of chances of success) in poor neighborhoods.

Since record label contracts act as a form of insurance for artists, guaranteeing an advance but potentially taking a great deal of revenue if the artist becomes a star, the amount and number of advances offered will be affected by the profit potential of stars, which depends on copyright protection.

Thus, even if, as you claim in 4), the number of people who take up music as amateurs is not affected by the income of stars, the number of people who are able to become professional musicians (and thus the number who "drop out") may well be affected by the monopoly profits afforded by copyright protection.

Of course, there are plenty of arguments for how technology may make being an amateur musician easier or reduce the need for a label backing or advance. Some of these could be applied to labels as well, though; labels could change the amount of recoupable expenses they undergo on behalf of the artists and thus sign more artists, not least because of competition from artists who would prefer to be without a contract under the new regime. The monopoly rents would still provide incentive for advances, however.

Again, I think these comments make sense. I think we agree on what needs to be true or not true for the profit of stars to be relevant. I don't pretend to know enough about the current music industry to know whether as an empirical matter it is relevant; I think I know enough about the publishing industry to know the answer there, and find it likely that the profits of stars are more important as an economic force in the music industry.
I agree that we have general agreement on the problem and issues, and I thank you for the discussion. While the music industry is also heavily dependent on stars, it's in the nature of advances and contracts that it differs from the publishing industry.

As I understand it, advances in the publishing industry are supposed to be calculated to be roughly half of the first year's royalties, as the publisher expects it. They tend to be fairly small for first novels, and the publisher highly expects them to be covered by royalties. Expenses such as advertising are not recoupable-- that is, they are not taken out of future royalties like the advance is. The book publisher, while highly dependent on bestsellers, generally expects to make a profit. Publishers have fewer and fewer midlist authors under contract to write many books.

Music label contracts are entirely different. The advances are much larger, and virtually all expenses, such as advertising, packaging, tour support, and everything else, are recoupable. The band sees no royalties until all such debts are covered, including the advance. The advances are much larger and the sales of an album are much more unknown. As a result, around 90 percent of albums lose money for the labels, and the vast majority of bands see no royalties other than their advance for many years, if at all. Bands are frequently signed to contracts for multiple albums to go with their one advance.

As a result of all this, the music label contract, perhaps mostly due to uncertainty about what will be a hit, operates much more like insurance than the publishing contract, which acts much more like a loan. (Though publishing advances do not have to be returned in the event that sales do not meet the target.) Since publishing advances are based on expected sales of the individual work, success by bestsellers does not affect the marginal author so much. Music advances are quite different and larger, and being based on more guesswork about what will chart, the projected income of stars does increase the advances offered the marginal professional.

So then, it seems like I've argued myself into a position of agreeing with you on the publishing industry, based on what I know about it, and perhaps of thinking that copyrights are best justified when the uncertainty about what will become a hit is greatest.

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