As reported by the NYT, legal music downloading for which record labels received royalty payments more than doubled last year. Nevertheless, the industry is still not making as much money as it would like. Unsurprisingly, the industry and sympathetic trade reporters attribute the difference between the huge profits the industry actually makes and the obscene profits to which they believe they are entitled to ‘piracy.’
Allow me to proffer a different explanation: we should expect that technology that shifts power to customers and makes the industry more competitive will lower the profit margins for incumbents. That’s Econ 101. In fact, if we didn’t see a decline in profits, it should make us profoundly suspicious of claims of competition. Competition, after all, supposedly lowers prices — remember?
As I have written previously, the music industry is increasingly running into the hard wall that is “reality.” The happy days when if you wanted music you bought it when the music cartel wanted, where they wanted, and how they wanted to sell it to you, are rapidly passing (barring such legislative actions as PERFORM designed to preserve the “glory days” of the music cartel forever). Not only was the industry forced to renounce the price-fixing ways that marked its conduct in the 1990s, but digital technology has now forced it to lose another arrow in its anticompetitive quiver: bundling.
Historic note: “Bundling” was a term in Colonial times for the practice of men and women courting one another to lie together in bed fully clothed for the purposes of mutual warmth while platonicly conversing. As with modern “bundling,” supporters of the practice claim that screwing people is NOT the object of the exercise — but one does have to wonder.
What I mean by “bundling” in this particular instance is requiring a person to buy a lot of songs they don’t want along with the song they do want. Everyone has heard the lament that a CD has maybe two or three good songs, but you must buy the whole CD. There’s a good economic reason for that. By requiring you to buy the whole CD, the music industry gets to charge you a stiff price for the song you actually want. But digital technology lets you buy just the one song you want — and at a price to match.
It is therefore unsurprising that as consumers embrace digital technologies, the entertainment cartel will continue to see profits fall. This is not a bug, it is a feature, because music industry profits until now were artificially inflated. In a more competitive market, we should expect profits of music companies to decline from obscene to “merely” ridiculous.
The problem in policy-land is that the music industry has been very good at framing the debate. First, the music industry stipulates that it is losing money due to piracy (using numbers of dubious validity). Then, it points to declining profits as proof that piracy is a scourge that Congress must eliminate at all costs. Unfortunately, this tends to make the debate about whether the music industry is actually losing money, if so how much, and what that means.
I propose we flip the framing on its head. If the music industry is competitive, why isn’t it experiencing the kind of razor-thin profit margins one associates with competitive industries? And given that most music companies entered into a consent decree saying (without admitting) that prices for music CDs were artifically inflated from 1995-2000 by the music cartel, shouldn’t we expect that music companies are seeing a decline in profitability? Indeed, wouldn’t it be highly suspicious if the usual suspects were achieving exactly the same level of profitability as they were before all the supposed competition of the Internet emerged?
So the next time some music industry flak trots out stats that show how the music cartel keeps losing money, congratulate them on proving the system works. You can console then with the thought that while it is tough to make a living in a competitive market, and incumbents would always rather regulate than compete, you have no doubt they can get the hang of it. They just need to buckle down and start selling customers what they want, rather than get Congress to pass laws requiring customers to pay inflated prices for the pleasures of “bundling.”
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