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Wednesday, Nov 25, 2009
In your paper you argue that MP3s will create a 20 percent decline in sales. How did you get this figure?
I may be going out on a limb in trying to do that but what I'm saying is, let's throw out the fact that cassettes are dying, because that seems to be happening on its own. If we remove that, and assume that half the computer owners have CD burners -- a number that I've seen -- you just double the decline that's already occurred. It should be less than that because the people who would be doing the most burning would be the ones who already have the burners. So that's where I come up with that number. That's not the death of the industry, but it's a severe decline.
Is this decline significant enough to justify new laws, like the Berman bill, which would give copyright owners the power to hack into people's computers to stop copying and trading?
In my own mind, I don't think a 20 percent decline warrants letting them override the other laws we have out there saying that you're not supposed to tamper with people's computers. That's my own view.
If [file-trading] was going to kill the record industry, you could understand why the record industry would be willing to go to any lengths to get [the Berman bill] passed. They also might be willing to do that for 20 percent if they're not paying the costs. But is society willing to impose a law like this on the public to protect the industry from a 20 percent decline?
If the industry wants to prosecute 18-year-old kids, they can make that decision. But I suspect I wouldn't be in favor of that if the government is going to be prosecuting 18-year-old kids. You don't want to, in my mind, create a situation in which we're saying that a large proportion of our population are criminals unless you think that there's some really strong reason to do that.
People can debate whether, say, criminalizing marijuana and making so many people violate the law is good or bad, but at least you have to understand what the costs and benefits are. And at least the people who are in favor of criminalizing it think it's a terrible, terrible thing. If you're going to do that [with file-trading], you have to ask if in fact there's a terrible thing going on. Is a 20 percent decline enough of a problem to say that we should go after these kids? If the record industry wants to foot the bill, because they think the benefits are greater than the costs, fine. But I don't want my district attorney spending my money going after 18-year-old kids who are downloading if it's only going to cause a 20 percent decline in sales for the industry.
When we last spoke, you said that a key historical sign would come from whether the introduction of audiocassettes had a negative effect on music sales. Your analysis here argues that tapes had no effect on sales, and if anything, sales went up when cassettes were introduced. What makes you think MP3s will be different?
The net effect of tapes was positive. But it doesn't mean that it wouldn't have been more positive if people weren't making more copies. [What is clear is that] there's no evidence in the data that the tapes caused a decline.
MP3s wouldn't do the same thing. The reason cassettes led to growth was that before cassettes existed, you didn't have portable music. You couldn't play recorded music in your car, and you couldn't play it walking around, in a Walkman. It was the little cassette that basically allowed you to do that. To be technically correct, there were 8-track players prior to cassettes. But they didn't have quite the same penetration. My theory as to what went on is that [the rise in cassettes] coincides almost perfectly with the penetration rate of the portable, Walkman-type of thing. So it opened up this whole new market, which overwhelmed any copying that went on.
You mention that price doesn't matter because album prices have tracked with inflation for the last 30 years: A 10-song recording today costs as much as it did in the '70s. This runs counter to the public perception that CDs are wildly over-priced, and I'm wondering if people think CDs are expensive because other musical components such as CD players have decreased in price, while CDs have not ...
It's possible, but the technology in creating stereos is not necessarily related to the technology used to create CDs. If you take a look at the book "Entertainment Industry Economics," the author goes through the cost of a CD, and in his older editions, he goes through the cost of an LP or a cassette. And the majority of the cost is not the production of the actual physical item. That may go down, but the majority of the costs are the other costs: publicizing albums, finding talent. There's no reason to think that those are going down because they're not technology-based. The small part, technology, is 15 percent of the item and that may be going down, but it doesn't have much of an impact. It's really amazing how prices have tracked so closely with inflation. It's almost as if the industry just bumps up prices with the inflation rate.
You also point out in your paper that there's been no differentiation in price when it comes to music, which is radically different from most markets for other products, such as TVs, for example, which come in a variety of sizes and prices. Do you think the industry needs to abandon this business model? Could this be a solution to the problem of MP3s?
I don't know if that's necessary but one of the things that the entertainment industry has always been really good at is differentiating products. With movies, you have the theater, the tapes, the pay-per-view, the HBO, then the TV. To me, the interesting thing is that historically, the record industry hasn't done much differentiation. What you might have expected was, say, a CD that was half the price of current high-quality CDs that just has a lower sampling rate. With MP3s, for example, when you rip a CD, you have a choice about whether you want to have CD-quality or near-CD quality or FM-radio-quality. When you're playing music on low-quality stereos, you wouldn't really hear the difference. So one of the things the industry could do with their downloads is have different prices. People with high-quality stereos aren't going to want to put the low quality material on, and the people who have lower quality stereos, with speakers that are incapable of producing the frequencies that let you hear the difference, then they'll buy the cheap ones. That would a way to broaden the market and increase their revenues. In a way it's surprising that the industry hasn't done that. And as they are trying to figure out their models for online sales, that would be one way of doing it.
How willing do you think the industry is to make such changes?
That depends on the individuals involved. But the fact of the matter is that if they're too rigid, they'll get replaced by some start-up that's not. That much is certain. You can't be terribly inefficient, terribly rigid and hang on.
