$5 CDs at amazon and internet economics

As per the Miscellany label, this post is at best tangentially related to the theme of this blog. Still, I’m taking it under good advice that I have every right to post and that my readers may very well have the desire to read opinions on topics other than my travel experiences. Posts like this will hopefully crop up from time to time and spice things up, perhaps generate some discussion.

In truth, I’m just trying to show my support for the internet-based rejuvination of the music industry. The following link is to Amazon’s sale on mp3 downloads; there’s a ton of great albums for 3-5USD. That to me is a fair price for the quality music and won’t put any more dent in your pocket than a cup of coffee and a scone.

http://www.amazon.com/500-599-Music/b/ref=amb_link_83646211_2?ie=UTF8&node=318772011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=ilm&pf_rd_r=0MF4BX81F4M9B0SWJEXR&pf_rd_t=101&pf_rd_p=469617551&pf_rd_i=163856011 (yes, I know)

Here’s my take on things. The internet is a reality; it provides a means by which exchange of data is 1) international, 2) widely accessible (i.e. both cheap and easy), and 3) anonymous. In the early stages of nearly-universal middle-class public access to the internet in the western world, these qualities manifested themselves in the widespread illegal distribution of music via the internet (remember napster?). Looking at these three fundamental aspects of the internet, this type of trafficking was inevitable. The largest players in the music distribution industry should have realized this and adapted. Instead, they sought to fight it in courts, which have always proven incapable of effectively generating policy on internet interactions (note the debate these days over enforcement of defamation laws on the internet).

It is of course easy to say that they should have adapted, but how? Well this takes us on a trip to what I imagine is economics 101. At the time, CDs were running $20 a pop. People that wanted a cheaper alternative headed to used CD stores, but somewhere along the line a large number of CDs would sell at 20USD. Napster provided a free method of obtaining this music. Now, doing something legally as opposed to illegally is worth something to people (I don’t know a study that shows this, I’m going off my own intuition, but if no such study has been performed I’d be astonished). Had record companies dropped their prices, say to 5 or 10 dollars a CD, I suspect that sales would not have plummetted as they did. When given the option of paying many hundreds of dollars to legally obtain the GBs of music they own or getting it for free illegally but virtually anonymously, how many people would really pay the money? At 5 dollars a CD, that equation changes. People may have said it’s not worth it to risk viruses and litigation with napster when its only a couple subway rides to buy a CD. Illegal music exchange on the internet could perhaps have been squelched in its infancy, essentially the record companies could have thrown their weight around with price reductions to drive napster out of business, in a way. Instead, they took the purely ’stick’ route with no carrot, illegal music exchange continued to flourish, and now a decade later people have gotten used to getting their music free. Now, record companies are forced to sell CDs at $5 because people are so accustomed to paying nothing. Even the $5 is a tough sell. Amazon and iTunes may both be making money off of mp3 sales, but the market is a lot smaller in dollar value (total music sales in the US have dropped from 14.6bblUSD to 10.4bblUSD in the last 8 years, and this figure is expected to continue to decline see wikipedia citations) while I suspect that people are listening to more music.

This was just one option of I’m sure several other economic routes of taking advantage of the internet for music distribution. As an example, I’d like to take the television industry. I know countless sites where one can watch TV shows and movies illegally, often low-quality south-asia or eastern europe based sites, plus pretty much any show or movie you want is out there as a torrent file. Still, the television industry has stayed this tide of illicit media viewing by offering advertising-based viewing of their shows online, legally. NBC and ABC started it off with buggy players a few years ago that offered one’s favorite shows, and Hulu has taken over, making $12mil profit at 17% margins in its first year, a figure one would expect to increase as the successful proof-of-concept increases the advertising price (notice there are fewer ad council ads and more bud light lime ads) and the number of available shows (note ABC just put LOST up on hulu). The reality is that people would be happy to watch a few advertisements to be able to see their shows any time they want. I recently heard an npr segment about how the quality of TV is rapidly improving, with the most successful shows becoming popular after their debuts and with little advertising (e.g. gossip girl). The speakers ascribed this phenomenon to the free access to shows online, which means that people not onboard on the first episode can hear about the shows from others and catch up online if they find they like it. (http://www.npr.org/templates/story/story.php?storyId=111992549). Finally, an internet model for TV conceptually works; many different shows can be watched by different users at the same time, people are no longer beholden to a specific time slot to catch a show and advertising revenue is no longer limited to people able to view at a given time. This is all not to say no stick was used, plenty of sites that I’ve frequented have been hit by C&Ds and shut down over the years, and the recent attacks on The Pirate Bay by the movie industry represent the most dramatic of these offensive tactics.

The bottom line is, the TV industry seems to be making successful headway in using the internet to provide reduced-price and increased-availability content to the consumer while profiting from it. The music industry failed in this regard, taking a purely aggressive legal route, similar to the movie industry. We’ll see how the market for media evolves in the decades to come.